AIG - Creative Till the End

From the WSJ:

American International Group Inc. in recent weeks has sought to rally support among investors and credit-ratings firms for a controversial deal: the sale of securities backed by insurance policies on the lives of older people.There have been few offerings of these types of securities, which critics have called "death bonds," "blood pools" and "collateralized death obligations" because they pay off when the insured dies. And AIG's effort so far isn't panning out. Standard & Poor's recently declined to provide a rating, an essential step in selling such securities to most investors.AIG's push highlights the giant insurer's outsize role as an investor in the market, known as life settlements—a role that has largely gone unnoticed.The giant insurer's life-settlements portfolio totals about $18 billion in anticipated death benefits, according to the company's financial filings—or well over a third of the estimated $45 billion that has changed hands since the market revved up about a decade ago.
Under AIG's recent proposal to sell securities based on part of its portfolio, a subsidiary of its Chartis property-casualty unit would collateralize notes worth $900 million with 1,157 policies acquired since 2001. AIG would sell $250 million to outside investors, according to its marketing materials.

Chartis also has been involved with life settlements in another way. It has sold "lender protection" insurance to a finance firm that lends to people to help them pay premiums on multimillion-dollar life policies, according to a prospectus for a stock offering by Imperial Holdings Inc. earlier this year.Chartis sold the "lender protection" coverage to Imperial from 2008 through 2010. It came in handy for Imperial, because borrowers, who typically take out two-year loans, have defaulted on 490 of 513 loans covered by the insurance and so far maturing, according to another Imperial filing. If borrowers cannot sell their policies profitably in the secondary market, Imperial can turn to AIG.As of Dec. 31, AIG had made good on 479 claims, paying more than $177.8 million and getting the policies in exchange, the filing shows. Imperial declined to comment.

Yes, this is the same AIG that took the other side of just about every derivative conceivable and blew up in the process.  Some firms never learn - even when owned by the US government.  I have reviewed these investments historically - even a synthetic one based on demographics and samples - and the investment is unwieldy.  Lets not forget about the actuarial assumptions used when underwriting the policy, how many investors can replicate that on a pool of policies.  Once again, we will enter the pool characteristics and sample data investment approach - seeing how well it worked out with past investments.  


Go figure.

AIG Recapitalization Summary and Breakeven

Some snippets (and a summary) from AIG's recap transactions:

Repayment of FRBNY Credit Agreement:

At the Closing, AIG will repay to the FRBNY in cash all amounts owing under the Credit Agreement, and the Credit Agreement will be terminated. As of the date hereof, the total repayment amount under the Credit Agreement is approximately $20 billion. The funds for repayment are to come from net cash proceeds from the initial public offering of American International Assurance Company, Limited and the sale of American Life Insurance Company, which are expected to occur in the fourth quarter of 2010, and from additional funds from operations, financings and asset sales. 

Summary:  Okay, here AIG will repay the FRBNY credit agreement ($20B) by asset sales and cash from the business. Here's how:

 Repurchase and exchange of the SPV Preferred Interest:


At the Closing, AIG will draw down all amounts remaining available to be funded under the Department of the Treasury Commitment pursuant to the Securities Purchase Agreement, dated as of April 17, 2009 (the “SPA”), between AIG and the Treasury Department relating to AIG’s Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock less up to $2 billion to be allocated to a new series of AIG’s preferred stock designated as the “Series G Cumulative Mandatory Convertible Preferred Stock” as described below. As of the date hereof, the total available funding under the Department of the Treasury Commitment is approximately $22.3 billion. AIG will use the Series F Closing Drawdown Amount to repurchase a portion of the FRBNY’s preferred interests in the SPVs corresponding to the Series F Closing Drawdown Amount and transfer the Transferred SPV Preferred Interests to the Treasury Department as part of the consideration for the Series F Preferred Stock.

Summary:  AIG draws down the $22.3B Treasury Securities purchase agreement (where the govt buys series F preferred stock from AIG) and buys FRBNY's interest in AILCO and AIA.  Interest in AILCO and AIA is then transferred to the Treasury.  This is how they fund the repayment of FRBNY credit agreement.

Now it gets fun, the exchanges of all outstanding preferred stock held by Treasury.

Series F preferred ($7B book value + $22B to be drawn):  they draw down Series F, buy the SPVs from the FRBNY and transfer AILCO and AIA to Treasury to repay the series F and exchange the remaining for 167MM shares of AIG..  Given the sales prices of AILCO ($15B) and what can be raised for AIA, I will call this paid.

Series G preferred (estimate $2B value):  Series G is created as part of the Series F drawdown up to $2B. This will be used to pay the FRBNY for any remaining interests it has in AIA and AILCO. Whatever is left at March 2012 will be converted to common stock.


Series C preferred ($23B book value):  At the closing, the Series C preferred stock will be exchanged for 562.9MM shares of AIG.

Series E preferred ($41B book value):  At the closing, the Series E preferred will be exchanged for 924.5MM shares of AIG.


The Treasury Department will then hold approximately 1.655 billion shares of AIG common stock, representing pro forma ownership of approximately 92.1 percent of the AIG common stock that will be outstanding as of the Closing.

Bottom line:  estimated $66B owed to Treasury, 16.55B shares held by Treasury = Treasury breakeven of approximately $38.  Share currently trade at $38.57.  Good luck.




Conditions to Close:

The parties will seek to promptly enter into definitive documentation to implement the Recapitalization and the other agreements described in the Summary of Terms. Among other closing conditions, it will be a condition to the Closing that AIG have sufficient cash proceeds available to fully repay all amounts owed under the Credit Agreement and that the FRBNY will not hold SPV Preferred Interests with an aggregate liquidation preference in excess of $6 billion immediately after the Closing. Additionally, AIG and certain of its key subsidiaries must have credit rating profiles, taking into account the Recapitalization, that are reasonably acceptable to the parties, and AIG must have in place at the Closing third-party financing commitments that are reasonably acceptable to AIG, the Treasury Department and the FRBNY.