American International Group backtracks on plan to sell Philamlife

MANILA, Philippines - The cash-strapped insurance giant American International Group (AIG) has decided not to sell Philippine American Life and General Insurance Co. (Philamlife) and other Asian assets, as the offers it received reportedly fell short of what it considers fair market value.

AIG was reported to be expecting about $2 billion from the sale of Philamlife, and between $10 billion and $20 billion from the sale of its insurance operations in Asia.

“AIG has decided to retain Philamlife, together with the operations of AIA (American International Assurance Co. Ltd.). We will continue to consider all strategic alternatives for AIA and evaluate expressions of interest from qualified parties with access to capital,” AIA president Mark Wilson said in a statement.

The Hong Kong-based AIA, considered the crown jewel of AIG in Asia, manages most of the Asia Pacific operations of the US insurer.

Wilson said Philamlife and all its subsidiaries will now be directly supervised by AIA instead of AIG.

He said they have come up with several options in creating conditions for the payment of existing and future debts.

Under the new repayment plan, AIA and the US-based American Life Insurance Co. (ALICO) will be separated from AIG through a divestment program designed to give the Federal Reserve Bank of New York (FRBNY) – AIG’s white knight - access to equity ownership.

“AIG intends to contribute the equity of AIA and ALICO into special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs. This will enable the Federal Reserve Bank of New York (or a trust for the benefit of the FRBNY) to receive preferred interests in repayment of a portion of the FRBNY facility. The amount of the preferred interests will be a percentage of the fair market value of AIA and ALICO based on valuations acceptable to the FRBNY. AIG will also hold the common interests in the SPVs. These transactions will reduce AIG’s debt and interest carrying costs, while allowing AIG to continue to benefit from its ongoing common interests in the SPVs,” AIG said.

Likewise, AIG said it intends to integrate a general insurance holding company, including its commercial insurance group, foreign general unit, and other property and casualty operations, into AIU Holdings Inc., with a board of directors, management team and brand distinct from AIG.

The establishment of AIU Holdings will assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares.

“The separation of AIA from AIG represents a major step forward for AIA and will reinforce its position as a leading company in Asia,” Wilson said.

AIG also confirmed that it had received proposals to acquire all or part of the share capital of AIA. These proposals are preliminary and are being reviewed along with AIG’s consideration of a full or partial initial public offer (IPO) of AIA.

The repayment-divestment package is reportedly valued up to $38.9 billion.

Sources within the two remaining bidders for Philamlife expressed disappointment with the sudden change of heart.

“We were asked to undergo due diligence, we were asked to submit a formal bid offer, and after all that, they just change their minds,” officials of the two group, who asked not to be named, said.

The two groups that formally made an offer for Philamlife were the partnership between the Ayala Group and Prudential Life of UK, and the team of Banco de Oro Unibank and Generali SPa.

Asked if they would make another bid should AIG-AIA change their mind anew, they said: ”Nothing has changed, our earlier offer stands.”

“Our take is that the Philippine bids were not to their liking, or lower than their anticipated valuation, so they had to offer their larger subsidiaries. They are, after all, still begging for money from their government,” an official from one of the bidders said.

AIG reported a staggering net loss of $61.7 billion in the fourth quarter of 2008 compared to the 2007 fourth quarter net loss of $5.3 billion.

Full year 2008 net loss was $99.3 billion, compared with a net income of $6.2 billion for 2007, distinguishing it as the worst corporate loss in a year in US history.

It is still asking the US government for another $30 billion in new capital and relaxed terms on its loans. So far, it has already received $150 billion in government aid.