AIG payback? Don't hold your breath

As the insurer prepares to present its restructuring plan to a House committee, experts say it's unlikely AIG will be able to repay the government.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- AIG Chief Executive Edward Liddy will appear before a House committee Wednesday to lay out the company's plan for paying back billions of taxpayer dollars.

Liddy has long been adamant that the insurer's primary objective is to repay the government, but insurance experts say that may be a lofty goal.

Within eight months, the government's bailout of AIG had ballooned to $182 billion, of which AIG has drawn more than $130 billion. But the insurer has managed to pay back just $3.2 billion.

"The magnitude of the amount of payback to the government is beyond the earnings capability of the company," said Andrew Barile, insurance consultant and chief executive of Andrew Barile Consulting Corp. "It's a mess, and I think AIG is totally confused about what to do."

The best laid plans. AIG's recovery was expected to be a relatively quick process. The strategy in September: Taxpayers provide $85 billion to help the company meet its obligations and give it the ability to sell some of its businesses to repay the loan.

In the current credit environment, few companies have been receptive to AIG's asking prices. Furthermore, as the value of underlying assets on its insurance contracts fell, AIG was required to post billions of dollars in collateral as a guarantee in the event of a credit default.

That caused AIG's bailout needs to more than double by March.

On Wednesday, Liddy is expected to lay out details of the company's current repayment and restructuring plan, known as "Project Destiny," at a House Oversight Committee hearing. However, a committee spokeswoman said AIG has not yet complied with a request to see details of the plan ahead of the hearing.

AIG spokeswoman Christina Pretto would only say that the company is "working closely with the committee to be responsive to their request."

The company's plan involves the government taking a stake in AIG's foreign life insurance units, and AIG selling up to 20% of its property and casualty business (AIU) in an initial public offering.

Why the plan may not work. Analysts say AIG's plan will not generate enough cash to repay the government for a number of reasons: the company is suffering tremendous losses, it can't raise its prices, the company is too complex and its IPO plan may be too small.

"We're talking about a number of years and a series of favorable outcomes," said Donald Light, senior analyst at insurance consultant Celent.

AIG posted its sixth straight quarterly loss last week, even as it made significant strides to wind down its financial products division, which was at the root of the company's collapse.

Typically when an insurance company takes a hefty loss, it can raise its premiums to make back the loss. But with an unprecedented amount of debt to repay, and state regulations that limit insurance rate hikes, that won't help AIG.

On top of that, AIG's structure is too intricate. AIG offers practically every type of insurance under the sun to a wide spectrum of customers. Some argue that AIG -- and it's competitors -- lack the ability and desire to synthesize such a sprawling entity.

Liddy said in prepared testimony that AIG is an "incredibly complex entity," and its restructuring plan "must make AIG less complicated."

"[Former CEO Hank] Greenberg's philosophy was to be the biggest at everything under one roof," Barile said. "That model is just not going to work going forward."

"Companies aren't going to write financial contracts for Chinese businesses and at the same time write a policy on some old lady's house in the United States," he added.

That may mean AIG's strategy for its AIU sale is misguided. The company wants to sell off the company as a single unit, even though a number of AIU's component businesses, including its workers compensation and surplus lines (i.e. alternative insurance against unique risks), are by far the largest in the country. Barile said AIG is still thinking too big.

"The only solution is to break AIU down even further and make smaller plays, which isn't really their style," he argued. "But if they can do 25 IPOs instead of three, they can possibly pay back the government."

An uneasy timetable. If AIG can, in fact, pay back the government, it won't be any time soon. The company said that AIU's IPO could take place sometime in 2010, at the earliest. And experts are looking even further out.

"It takes a while to position a company to be in a state where it can be IPOed," said Pretto. "It's a lengthy process, because you need to set up a board of directors, go to market, produce a financial statement, and set up various infrastructure."

Analysts say part of the problem is that there are too many factors out of AIG's control, including the state of the economy and the state of the insurance industry.

"It's anyone's guess what things are going to look like in 2013," said Light. To top of page

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