April 20, 2024

DealBook: Treasury Gets Small Profit From Sale of A.I.G. Stock

Robert H. Benmosche, chief executive of A.I.G., led it to the share offering.ReutersRobert H. Benmosche, chief executive of A.I.G., led it to the share offering.

9:32 p.m. | Updated

The United States Treasury wrung a small profit on Tuesday from the first sale of its shares in the American International Group, a major step toward unwinding the government’s ownership from a 2008 bailout.

The insurer raised at least $8.7 billion from the offering, which priced shares at $29 each. After the offering, Treasury’s stake in the company fell to about 77 percent from 92 percent. Its ownership stake could fall even more if underwriters are able to sell an additional 45 million shares for the government through an overallotment option.

As a result, both the Treasury and A.I.G. called the offering a major accomplishment, reassuring taxpayers that they would not lose an enormous sum of money and encouraging new investors to consider the company. The Treasury made $54 million from the sale on Tuesday.

“Today’s announcement represents an important milestone as we continue to exit our stake in A.I.G. and wind down TARP,” said Timothy F. Geithner, the Treasury secretary.

But the price set was barely above the Treasury’s break-even price of about $28.73. While expectations for the offering had been high — at one point, the so-called “re-I.P.O.” was speculated to attract as much as $25 billion — A.I.G.’s stock price has slid 49 percent this year.

And the government still has about 1.5 billion more A.I.G. shares to sell at a time when investors are questioning the profitability and long-term value of the company’s core insurance business.

A.I.G. has jettisoned several major divisions, refashioning itself into a leaner company focused on providing global property and casualty insurance and domestic life insurance.

Yet while A.I.G. is now a simpler company, doing more than half of its business under the name Chartis, it may still be too soon for investors to fully understand it. The insurer itself raised a major question about its value on Tuesday, when it acknowledged in a regulatory filing that it had not been forthcoming with investors about the adequacy of its reserves.

The filing indicated that in a recent road show to market the stock, A.I.G. executives told investors that the company’s reserves had been vetted by two federal bodies, the special inspector general for the Troubled Asset Relief Program, and the Government Accountability Office. In fact, the filing said, neither body had reviewed its reserves.

Reserves refer to the money that insurers set aside over time to pay claims. They are important to investors because if a company discovers it has not set aside enough, it must bolster the reserves by diverting money from income.

That is what happened to A.I.G. It said earlier this year it would take a $4.1 billion charge to earnings after an annual review showed it had to bolster reserves at Chartis; the same type of review a year earlier caused the company to set aside an additional $2.3 billion on a pretax basis. Those announcements seemed to vindicate a previous research report by firm Sanford C. Bernstein Company, which warned of a looming shortfall in A.I.G.’s property and casualty reserves.

More recently, A.I.G. has disclosed $1.7 billion of pretax catastrophe losses from the earthquakes and nuclear accident in New Zealand and Japan, and from the flooding in Australia. The company’s possible exposure to the recent storms and floods in America is not known.

New filings with state insurance regulators also show that the largest operating subsidiaries of Chartis, including American Home Assurance and the National Union Fire Insurance Company of Pittsburgh, do billions of dollars of business with each other. They are essentially relying on each other to an unusual degree to make good on their promises.

Even after the companies were disentangled under federal oversight, some of the subsidiaries’ relationships have grown. National Union, for instance, is owed about $38 billion in reinsurance payments from more than 40 related companies all over the world as of the end of last year, according to filings with its home state regulator, Pennsylvania.

Treasury acquired its enormous stake through its rescue of A.I.G. during the financial crisis of 2008, when the government committed to providing up to $182 billion in assistance.

After Tuesday’s offering, the Treasury Department’s remaining investment in A.I.G. will fall to about $53 billion. It still owns about 1.4 billion common shares and $11.4 billion worth of preferred shares. The Federal Reserve Bank of New York also has about $23.6 billion in loans outstanding to two investment vehicles set up to house A.I.G. Securities.

In charting their plans for the offering, Treasury officials again face the difficult task of quickly shedding their stakes in the company while reaping a fair price for taxpayers.

While the government still has significant investments in several companies, including General Motors and Ally Financial, A.I.G. has long been considered the biggest and most prominent reminder of the 2008 crisis.

For A.I.G., the offering was a vital part of its effort to re-establish itself as a private company. Under its chief executive, Robert H. Benmosche, A.I.G. has already sold off a number of businesses to help pay off the Treasury Department and the New York Fed, including several big Asian life insurance units. And late last year, the company sold $2 billion in new debt.

Under the terms of the offering, the Treasury Department is prohibited from selling additional shares for 120 days. Government officials previously expressed hope that they could sell the entire stake within two years.

Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs and JPMorgan Chase led the stock sale. The company disclosed this month that it would cover the government’s fees in the stock sale, at a cost of nearly $400 million.

Article source: http://feeds.nytimes.com/click.phdo?i=19e519dff21fda339a50b68be92d0923

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