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The United States government has agreed to commit an additional 30 billion dollars to aid the once largest insurer, AIG, American International Group Inc. The $700 billion Troubled Asset Relief Program will serve as the source of financing for the additional equity commitment which gives AIG the opportunity to issue preferred stock to the government.

In addition to this, AIG is granting the Federal Reserve a preferred-stock interest in its American Life Insurance Co. (Alico) in return for reducing its debt. Alico is the source of more than half of its revenue from Japan, along with its Hong Kong-based life insurance group American International Assurance Co. (AIA).

According to one of two sources, the plan being presented allows AIG to still own the common equity, while the two businesses will be transferred into separate trusts. A source with direct knowledge of this matter reports that it is suspected that the government probably will receive a 5 percent cumulative dividend on its preferred-share stake in these trusts.

Alico and part of AIA have been up for sale by AIG and it is still possible that they will find a buyer. Some bids have already been received, according to the source.

There is another option being considered and that is to take these units public when markets improve, according to the source.

Some U.S. life insurance policies may also be securitized by AIG which would also securitize and give them to the government to further reduce its debt, the sources add.

According to this scenario, the company would securitize as much as $10 billion under that plan, according to one of the sources.

Such a debt-to-equity swap combined with the securitizations would help AIG to repay much of the approximately $38 billion it has already received from its government credit line, that sources say.

PROPERTY-CASUALTY SPINOFF
In order to pay back the government, AIG announced last year that it plans to sell all of its assets with the exception being its U.S. property and casualty business, foreign general insurance and the company's ownership interest in some foreign life operations.

Because of the present financial turmoil, although the company has succeeded at making some sales, it has had difficulty finding buyers and receiving an acceptable price for its assets.

In light of this, AIG is now planning to sell off as much as 20 percent of its property-casualty business in an initial public offering. This could eventually lead to a complete spin off the business, one source said.
So as to differentiate it from AIG, the business would be renamed and have its own management and board of directors.

One of the major potential buyers may receive aid from the government to effect a purchase and that is International Lease Finance Corp., sources said.

One of the sources said that ILFC has some debt that comes due in 2009 which if needed, could be used by AIG in its new equity commitment to help potential buyers.

When asked to comment on this, an AIG spokeswoman refused comment.