AIG May Use Tax Benefits of Selling Stakes to Repay U.S. Taxpayers

By | September 11, 2009

American International Group Inc. may sell stakes in its businesses, rather than shedding entire units, to repay U.S. government bailouts, retaining huge tax benefits, according to a source familiar with the matter.

The strategy differs from what AIG CEO Robert Benmosche’s predecessor, Ed Liddy, initially sought to do: sell off subsidiaries as fast as possible to help pay back $80 billion borrowed from the government.

But selling more than 20 percent of a business could cost American International Group Inc. a valuable asset — the ability to use losses to reduce future tax bills. AIG recognized about $12.8 billion of these “deferred tax assets” on its books at the end of June, and that number could rise if AIG’s business stabilizes.

AIG has already sold a U.S. auto insurance business and recently reached a deal to sell part of an asset management unit.

But many other parts of the sprawling multinational are still on the block, from aircraft lessor ILFC to Asian life insurer Alico. Some observers have estimated that deals for these units could raise $20 billion or more. But many sales have stalled amid a weak deals market.

Now, Benmosche is pondering whether tax benefits could make it more worthwhile to hold off on selling AIG’s largest, most profitable units.

Take its property/casualty division, Chartis. The unit is worth about $40 billion, and finding a buyer willing to pay that much would be a tall order.

Even an initial public offering of that size would be tough to pull off. The largest U.S. IPO, by Visa Inc, raised less than $20 billion.

Still, floating up to 20 percent of Chartis in an IPO could raise more than $8 billion. Plus, the unit could provide billions of dollars more in deferred tax assets as it grows more profitable.

“You can pay back billions of the obligation to the U.S. taxpayer just by making smart use of (tax loss) carryforwards that AIG Inc. is sitting on,” according to the source, who asked not to be named.

AIG, which recorded nearly $100 billion in losses last year, is not the only U.S. corporation to seek to turn losses into tax benefits. But it may be the only one seeking a way to repay government debt by taking advantage of money it would otherwise ultimately pay in taxes to Uncle Sam.

AIG did not comment on Benmosche’s plans, but the CEO told Reuters in an Aug. 26 interview that he expected to take a month or two to reshape AIG’s turnaround plan.

Analysts agree that AIG should sell carefully. “If you sell everything right away, you will never get out of the hole,” said Clifford Gallant, an analyst with Keefe, Bruyette & Woods who owns AIG stock.


Benmosche, a former CEO of MetLife Inc., is the fourth executive to lead AIG since June 2008. His arrival stirred hopes that the company could be rescued.

So far, Benmosche has pulled the plug on one asset sale, a small broker-dealer division. But plans for initial public offerings of stakes in its largest, most valuable units are continuing apace.

Benmosche said the timing of these sales will depend on market conditions.

AIG, once the world’s largest insurer by market capitalization, nearly failed last September when it faced massive collateral calls and lacked the cash to meet them. The U.S. government stepped in to bail out the company and has had to offer additional assistance several times since.

Selling even small stakes in some units through IPOs could be a boon for AIG subsidiaries and help boost the confidence of employees and customers. With a public flotation of stock, the units would operate more or less as stand-alone entities and have their own market-driven valuations, more autonomous management teams, financial ratings and an ability to tap debt markets.

In the case of two of its largest life insurance operations, AIA and Alico, IPOs could also open up ways for the government to monetize preferred stakes in the companies. Washington agreed to take preferred stakes in both firms in exchange for eventually cutting AIG’s outstanding loan balance, currently about $80 billion, by about $25 billion.

To date, the government has put as much as $180 billion into AIG’s bailout, and now owns nearly 80 percent of the company.

The government support includes $80 billion in outstanding loans, additional funds set aside for AIG to draw down as needed, and billions of dollars more to buy toxic mortgage assets, which had been a liability for AIG.

(Reporting by Lilla Zuill; editing by John Wallace

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