US agrees fourth rescue plan for insurance giant AIG; Insurer reports $61.7 billion fourth-quarter loss - - the biggest in US corporate history.

The US Treasury Department and the Federal Reserve today announced the fourth rescue of insurance giant AIG  - - American International Group Inc - -  since last September, in order to stabilise what they termed this systemically important company in a manner that best protects the US taxpayer. Specifically, the government's restructuring is designed to enhance the company's capital and liquidity in order to facilitate the orderly completion of the company's global divestiture program. AIG posted a record $61.7 billion fourth-quarter loss - - the biggest quarterly loss in US corporate history.

AIG said severe credit market deterioration and charges related to ongoing restructuring activities contributed to a record net loss for the fourth quarter. For the fourth quarter of 2008, AIG reported a net loss of $61.7 billion or $22.95 per diluted share compared to a 2007 fourth quarter net loss of $5.3 billion or $2.08 per diluted share. The fourth quarter 2008 adjusted net loss, was $37.9 billion or $14.17 per diluted share, compared to an adjusted net loss of $3.2 billion or $1.25 per diluted share for the fourth quarter of 2007.

The federal government in agreeing a new plan for AIG, is in effect rejigging its existing $150 billion bailout in a bid to support the embattled insurer, but its plan will expose U.S. taxpayers to more financial risk.

In the new deal, which is the fourth such effort, the government is relaxing loan terms by wiping out interest in hopes of preserving AIG's value over a longer period.

The plan raises the possibility that the 90-year-old group will be broken up completely, with businesses being spun-off in separate stock offerings, although that process would likely take years. The company is planning to combine its giant property-casualty insurance operations into a new unit, with a new name and separate management, and to sell close to 20% of it to investors.

Under the new plan, the US provides AIG with access to up to $30 billion in new cash from its Troubled Asset Relief Program, or TARP, but will also reduce the insurer's $60 billion credit line with the Federal Reserve to between $20 billion and $25 billion. The 10% annual dividend on the company's $40 billion preferred shares could be reduced to zero.

The US government says the company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally.  The additional resources will help stabilize the company, and in doing so help to stabilize the financial system. 

As significantly, the restructuring components of the government's assistance begin to separate the major non-core businesses of AIG, as well as strengthen the company's finances. The long-term solution for the company, its customers, the US taxpayer, and the financial system is the orderly restructuring and refocusing of the firm.  This will take time and possibly further government support, if markets do not stabilise and improve. 

The US says given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high.  AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. AIG has over 30 million policyholders in the U.S. and is a major source of retirement insurance for, among others, teachers and non-profit organizations.  The company also is a significant counterparty to a number of major financial institutions.

AIG operates in over 130 countries with over 400 regulators and the company and its regulated and unregulated subsidiaries are subject to very different resolution frameworks across their broad and diverse operations without an overarching resolution mechanism.  Within the options available, the restructuring plan offers a multi-part approach which brings forward the ultimate resolution of the company, has received support from key stakeholders and the rating agencies, and provides the best possible protection for taxpayers in connection with this commitment of resources.

The US says the steps announced today provide tangible evidence of the US government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration.  Orderly restructuring is essential to AIG's repayment of the support it has received from U.S. taxpayers and to preserving financial stability.  The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due.

Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible. This restructuring is aimed at accelerating this process.

The Treasury says key steps of the restructuring plan include:

Preferred Equity

The US Treasury will exchange its existing $40 billion cumulative perpetual preferred shares for new preferred shares with revised terms that more closely resemble common equity and thus improve the quality of AIG's equity and its financial leverage.  The new terms will provide for non-cumulative dividends and limit AIG's ability to redeem the preferred stock except with the proceeds from the issuance of equity capital. 

Equity Capital Commitment

The Treasury Department will create a new equity capital facility, which allows AIG to draw down up to $30 billion as needed over time in exchange for non-cumulative preferred stock to the U.S. Treasury.  This facility will further strengthen AIG's capital levels and improve its leverage.

Federal Reserve Revolving Credit Facility

The Federal Reserve will take several actions relating to the $60 billion Revolving Credit Facility for AIG established by the Federal Reserve Bank of New York (New York Fed) in September, 2008, to further the goals described above.

 Repayment by Preferred Stock Interests

 The Revolving Credit Facility will be reduced in exchange for preferred interests in two special purpose vehicles created to hold all of the outstanding common stock of American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance holding company subsidiaries of AIG.  AIG will retain control of ALICO and AIA, though the New York Fed will have certain governance rights to protect its interests.  The valuation for the New York Fed's preferred stock interests, which may be up to approximately $26 billion, will be a percentage of the fair market value of ALICO and AIA based on valuations acceptable to the New York Fed. 

 Securitization of Life Insurance Cash Flows

 The New York Fed is authorized to make new loans under section 13(3) of the Federal Reserve Act of up to an aggregate amount of approximately $8.5 billion to special purpose vehicles (SPVs) established by domestic life insurance subsidiaries of AIG.  The SPVs would repay the loans from the net cash flows they receive from designated blocks of existing life insurance policies held by the parent insurance companies.  The proceeds of the New York Fed loans would pay down an equivalent amount of outstanding debt under the Revolving Credit Facility.  The amounts lent, the size of the haircuts taken by the New York Fed, and other terms of the loans would be determined based on valuations acceptable to the New York Fed.

 Restructuring of Other Terms

 After the transactions described above, the total amount available under the Facility will be reduced from $60 billion to no less than $25 billion. In addition, the interest rate on the Facility, which is three-month LIBOR plus 300 basis points, will be modified by removing the existing floor (3.5 percent) on the LIBOR rate.  The Facility will continue to be secured by a lien on a substantial portion of AIG's assets, including the businesses AIG plans to retain.  The other material terms of the Facility remain unchanged.

 Issuance of Preferred Stock

As required by the credit agreement governing the Revolving Credit Facility, AIG has agreed to issue on March 4, 2009, shares of convertible preferred stock representing an approximately 77.9% equity interest in AIG to an independent trust for the sole benefit of the United States Treasury.

AIG must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act, including the most stringent limitations on executive compensation as required under the newest amendments to the Emergency Economic Stabilization Act.  Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements.