American International Group Inc. will be allowed to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, New York Gov. David Paterson said today.
The move comes as AIG continues to review its operations and discuss alternatives with outside parties, reportedly including Warren Buffett's Berkshire Hathaway Inc., to improve its business amid concern the world's largest insurer could need up to $40 billion to shore up its balance sheet.
Paterson asked New York state insurance regulators to essentially allow AIG to provide a bridge loan to itself. The governor has also asked the head of New York's insurance department to talk with federal regulators about providing an additional bridge loan to AIG.
"AIG still remains financially sound," Paterson said.
The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.
It also helps AIG by "giving them what they need most, which is time," said Keefe Bruyette & Woods analyst Cliff Gallant, who added that the relaxation of insurance regulations is "unprecedented."
Typically, a state insurance commissioner's priority is to protect the policyholder, and that includes making it very difficult for an insurer to access the funds that are used to pay claims.
AIG could face significant claims from Hurricane Ike and Gustav, which have battled the Gulf Coast, but even as bad as they are, "AIG is a big company, and I would expect they will be able to meet their claims," Gallant said.
"Those events do not cause an immediate cash problem for the company," he added.
If an insurer cannot pay their claims, the state's insurance fund, which is backed by other insurance companies who do business in the state, would help pay off policyholders.
"If anyone's been put at risk, it's the other insurance companies who do business in the state," Gallant said.
AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.
Shares of AIG — once the world's most valuable insurer by market value — fell $6.63, or 54.6 per cent, to $5.51 in afternoon trading. They had been down as much as 71 per cent to $3.50 before Paterson's comments.
According to news reports, New York-based AIG was seeking $40 billion in emergency funds — possibly from the Federal Reserve — to help the insurer avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. AIG has already raised $20 billion in new capital this year.
AP