The American International Group faced two distasteful options on Tuesday: selling prized assets to competitors or handing over a big part of its business to the federal government.
Edward Liddy, chief executive of the American International Group, wants to sell parts of the company to pay off loans.
Grappling with huge losses, A.I.G. appears to have few choices as the government focuses on trying to keep the giant insurer from toppling and perhaps injuring other institutions.
The insurer has received a preliminary offer of $11 billion from MetLife for its American Life Insurance Company subsidiary, called Alico, according to people with knowledge of the discussions, who asked not to be identified because the details of the deal were not public. But they said MetLife’s offer might slip to about $8 billion, as more became known about how the global downturn is affecting Alico, which has operations in more than 55 countries. The same sources said A.I.G. had received an offer from AXA, for all of Alico except its operations in Japan. The price was not disclosed.
But A.I.G.’s need for capital appears to be growing so quickly that $8 billion, or even $11 billion, would not come close to filling the hole. A.I.G. is expected to report fourth-quarter losses of perhaps $60 billion early next week, and losses on that scale could initiate a domino effect like the one that flattened the company last September. First would come a credit downgrade, then calls from trading partners to post the billions of dollars in collateral that their contracts stipulate after a downgrade.
If A.I.G. failed to produce the required amounts, the financial institutions holding its contracts would have to recognize losses of their own. That would erode their capital, leaving them at risk of downgrades as well.
Facing a deadline at the end of this month, A.I.G. and the government are looking for a way to get more value from the insurance subsidiaries than they think could be captured in a sale to a competitor like MetLife or AXA. One person close to the discussions said it might resemble a private equity arrangement, in which the federal government would take ownership of A.I.G.’s operating units, then later sell them in an initial public offering.
The goal of such a government purchase would be to inject capital into A.I.G. and to keep it from having to sell valuable assets when prices are depressed. But it would also put the federal government in the incongruous position of owning one or more insurance companies and competing with insurers in the private sector.
“They wouldn’t like that, but they wouldn’t have a heck of a lot of choice,” said Douglas J. Elliott, a fellow at the Brookings Institution. “It’s not like the government went out of its way to get these companies.”
Edward Liddy, A.I.G.’s chief executive, has said since he was brought in during last fall’s crisis that he wanted to sell dozens of operating units to raise money to pay off the federal government’s loans. But the sales have come slowly. A.I.G. is so large there are few buyers to begin with, and financing for deals has been scarce in the credit squeeze.
Shrewd buyers also appear to have been biding their time, expecting to get better deals as the pressure mounts on A.I.G.
While they waited, the economy has soured and A.I.G.’s operating units have lost value. Its customers have been shifting their business elsewhere, and competitors have been poaching executives.
“It looks like they’re in a downward spiral,” said Andrew J. Barile, an insurance industry consultant. “They’re in a position where they’re almost forced into selling.”
Another possibility being discussed for A.I.G. is the conversion of the government’s holdings of A.I.G.’s preferred stock, worth $40 billion, into common shares. That would provide some relief because the preferred stock gets a 10 percent dividend, and the company would not pay any dividend on the common stock.
Christina Pretto, an A.I.G. spokeswoman, said the company could not provide information about its finances or possible deals in the quiet period just before its earnings were released.
An AXA spokesman said the company would not comment on reports of an offer for Alico. A MetLife spokesman did not respond to a call seeking comment.
MetLife, the largest American life insurer, raised $2 billion in a stock sale last October, when its capital position was relatively strong. Market watchers took it as a sign that MetLife was getting ready to move as other companies’ share prices fell and acquisition possibilities emerged.
Alico could serve as a springboard into dozens of countries, including some that have big untapped consumer markets because insurance products are not yet in widespread use.
