Which Assets Will AIG Sell?

Since taking over as chief executive of ailing insurance giant American International Group (AIG) on Sept. 18, Edward M. Liddy has given few details of his plan for reviving the company. But one thing is clear: He's moving fast. Despite AIG's size and complexity, with dozens of divisions in 130 countries, Liddy has said he will restructure in a matter of weeks, not months. What's driving him is not just the onerous interest rate AIG has to pay on its $85 billion line of credit from the Federal Reserve Bank of New York. With each passing day, AIG's best assets, its insurance businesses, are eroding in value as competitors lure away AIG customers and key employees polish their rsums. "Uncertainty is very bad for AIG's insurance units," says David W. Steuber, a Los Angeles partner at law firm Howrey and an adviser to many AIG customers.

Liddy has said he hopes to keep as much of the insurance business within AIG as possible. But faced with the need for capital to cover its disastrous mortgage bets, AIG may have to put many of its corporate gems on the block quickly. And in a new survey by Insurance Journal, more than 60% of the 1,000 brokers who responded expect to do less business with AIG in the future.

In a report published on Sept. 23, Credit Suisse Group (CS) put an aftertax value on AIG's assets at anywhere from $94 billion to $122 billion. The final tally will depend on how big a "distressed discount" it will face. Even now, the noninsurance businesses are beaten down, with AIG's aircraft leasing operation expected to fetch roughly $2.2 billion after taxes (a Citigroup (C) analysis puts the unit's book value at $7 billion). Tough times will drive down all prices. AIG's profitable foreign life insurance business, with its strong position in Japan, is expected to fetch around $24 billion—much less than its estimated value a year ago.

One argument for selling some insurance holdings now is that buyers are already circling. Even before AIG's woes, the weak U.S. dollar had sparked interest from foreign insurers hunting for market share. And unlike banks, these insurers have more than enough assets to cover potential policy losses and are looking to put some of that surplus capital to use. Industry experts have Germany's Allianz (AZ), Italy's Assicurazioni Generali, and France's AXA (AXA) (none of which would comment) on the short list. Japan's Tokio Marine Holdings (TKOMY), which recently bought insurer Philadelphia Consolidated Holding (PHLY) for $4.7 billion, is also on the list; it did not respond to calls. Bermuda-based companies, which often underwrite such risks as terrorist strikes, may want AIG's "surplus lines" business.

Meanwhile, a group of AIG equity investors is looking for ways to pay off the government loan. Thirty-five of them met on Sept. 22 in the New York offices of law firm Mayer Brown, where partner Mickey Kantor, a former Commerce Secretary, coordinated the discussion. Among those at the table: former AIG Chief Executive Maurice R. "Hank" Greenberg, SunAmerica founder Eli Broad, and representatives of the $154 billion New York State Common Retirement Fund. "We believe it's possible, but daunting, to find in a reasonable amount of time the private capital to re-privatize AIG," says Kantor—a stance he maintained a day later, when AIG signed a definitive agreement with the New York Fed.

SKITTISH CUSTOMERS

One worry for potential buyers is bad investments lurking inside any units up for sale. Another is the long-term health of the brand as AIG tries to hold on to its customers and employees. Industry sources say ACE (ACE), Ironshore, and C.V. Starr have contacted brokers for AIG customers to grab business. ACE and Ironshore acknowledge contacting brokers to help customers. C.V. Starr, once an AIG affiliate, did not return calls. On Sept. 19, ACE ramped up capacity for certain commercial insurance to woo clients. CEO John Lupica noted that the situation "underscores the importance of partnering with a financially strong insurer." Andrew Colannino, an analyst at insurance rating agency A.M. Best, asserts that "some erosion of franchise value and customers will happen."

Most of AIG's operating companies are well financed, and insurance regulators from dozens of states have made statements backing their health. Even so, AIG executives face constant questioning. At its U.S. commercial insurance business, which posted $5 billion in earnings over the past 12 months, CEO John Q. Doyle and his finance chief, Robert S. Schimek, say they've held conference calls since AIG's bailout with as many as 10,000 clients on the line at a time. The No. 1 question: Will the parent company's woes suck money out of the stellar insurance business?

Doyle says he hasn't been losing customers. But John Phelps, director of business risk at Blue Cross & Blue Shield of Florida, says he's discussing options with his broker and his underwriter at AIG. He's sticking with the company for now, but "when we get closer to our [policy] expiration date," Phelps says, "we may ask to look at alternatives, just in case."

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