AIG is to money as black holes are to light: sucky.
NEW YORK–(BUSINESS WIRE)–American International Group, Inc. (AIG) reported today that continued 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, as defined below, 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.
AIG’s results in the fourth quarter were negatively affected by continued severe credit market deterioration, particularly in commercial mortgage backed securities (CMBS), and charges related to ongoing restructuring-related activities. Despite these challenging conditions, insurance premiums and other considerations declined only modestly by 1.9 percent for the fourth quarter compared to the fourth quarter of 2007. For the year, premiums and other considerations grew by 5.3 percent.
Making the net loss for 2008 a spectacular $99.3bn — just shy of $100bn.
There’s lots going on here, but at a glance we note the effect of fair value accounting on AIG’s financial services unit, which posted a $17.6bn fourth-quarter loss.
AIG Financial Products Corp. (AIGFP) net operating results for 2008 include the effect of changes in credit spreads on the valuation of its assets and liabilities since AIGFP elected to account for most of its financial assets and liabilities at fair value upon the adoption of FAS 159 on January 1, 2008. Previously, these effects were only recognized in earnings once realized upon a sale, maturity, impairment or termination. AIGFP , which is in the process of winding down its businesses and portfolios, contributed $17.2 billion to the Financial Services loss, primarily from the unrealized market valuation losses on its super senior credit default swap portfolio and credit valuation adjustments.
As speculated, the loss has necessitated action (again) from the US Treasury.
Preferred Equity
The U.S. 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.
Related links:
AIG fourth-quarter results – Business Wire