Will AIG Ever Pay Us Back?

BNET.com Columnist Ed Leefeldt Weighs In On The Issue For 60Minutes.com

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Written by BNET.com columnist Ed Leefeldt.

As we taxpayers poured $180 billion into American International Group, the insurance colossus brought down by a rogue derivatives trading division, we were told that the company's main lines of business were fundamentally strong.

AIG's core property, casualty and life insurance units were said to be rock solid assets that could in a reasonable amount of time earn enough money to pay back the rescue loan. However, that promise never took into account the damage the rescue loan itself would to AIG's reputation. Now the taxpayers' payday looks more remote than ever.

CEO Edward Liddy, the former head of Allstate, was brought in to shut down the radioactive Financial Products division and turn the company around on the strength of its core businesses. No such luck. Rather than the CEO of a chastened but healthy insurer, he has essentially become the auctioneer of insurance businesses that grow cheaper by the day.

Every time Liddy gets rapped on the knuckles by Congress, every time the words "AIG bonuses" hit the headlines, the brand that was once the gold standard of the insurance industry acquires another layer of tarnish. Let's face it: If you were buying a multimillion-dollar insurance policy for your company or an annuity to see yourself through retirement, would you go with a company that's become a poster boy for failure?

The horrible publicity has gone right to AIG's bottom line. In the first quarter, AIG's home and auto loan business would have lost almost a quarter of a million dollars but for gains related to the sale of an old industrial reinsurance unit. Behind the losses was an 18 percent decline in premiums paid, which the insurer blamed on "negative AIG publicity." At the same time, its life-insurance unit posted a $1.8 billion loss.

In the face of it all, Liddy seems ready to throw in the towel. Once he talked about saving AIG's property and casualty business, and carrying on in a smaller company. Now the talk is about dissolution, not downsizing, and the operative word is "breakup."

A breakup by itself doesn't mean that AIG would be unable to pay back taxpayers-as long as the businesses being auctioned off by Liddy still commanded the premium prices they once would have fetched. But for now, at least, the brand name is sheer poison.

Consider: The AIG name has been damaged so badly that the company is literally scraping it off the office walls. AIG's prized general insurance operation, which protects homes and businesses, is trying to give itself a makeover, using, at least temporarily, the name AIU Holdings (no points for originality there). AIG was happy to take nearly a $200 million loss to sell its 21st Century insurance business, which competes with GEICO.

  • Losses are still in the billions. In the first quarter of 2009, AIG stemmed some of the blood that flowed at the end of 2008, when it reported a $61.7 billion loss. The most recent period's loss was "only" $4.4 billion, but still more than enough to discourage any window-shopping potential acquirers.
  • AIG has already given up trying to find a buyer for its foreign life insurance businesses. For now, AIG will tuck both of its foreign life insurance businesses into "special purpose vehicles" -- off-balance-sheet entities designed to be fenced off from any further collapse in the rest of the company. Whether that works or not may be a question for the courts.
  • As if all the negative press weren't bad enough, other insurance companies that would be the natural buyers for AIG businesses now have little wherewithal for making acquisitions. Hartford Financial, for example, is trying to sell its own lines of business, and insurance companies overall have seen their stock prices plunge, which limits their acquisition options. Six insurers are now considered weak enough to get some of the same federal funds that AIG received last year.

    The tragedy is that AIG's insurance businesses really don't deserve the guilt-by-association treatment. State insurance regulators, who unlike the federal government didn't contribute to the AIG bailout and therefore directly have skin in the game, insist AIG's core assets are sound.

    New York Insurance Superintendent Eric Dinallo, who was called into the original negotiations for AIG's federal bailout last October, declares that "there;s tremendous value in AIG's insurance companies.... They're robust and they're solvent." If only AIG could convince its customers of that.

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    Written by BNET.com columnist Ed Leefeldt