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FINANCIAL SYSTEM IN CRISIS : INSURANCE

Some AIG units in state could see eager buyers

September 18, 2008|Marc Lifsher and Peter Pae | Times Staff Writers

Bargain hunters could snag some good deals by buying parts of troubled American International Group Inc.'s profitable subsidiaries in California and around the world, market analysts predicted Wednesday.

Top-earning units that could be up for grabs in the state include 21st Century Insurance Co. of Woodland Hills, the state's seventh-largest automobile insurer, and International Lease Finance Corp. of Century City, which owns more than 950 commercial airliners.

AIG also is the No. 1 provider of workers' compensation insurance in California, controlling about 11% of the market with $726 million in premiums written in 2007.

"There are a lot of assets that could be sold," said J. Robert Hunter, insurance director for the Consumer Federation of America. "The federal government could make money on this deal."

But no sale would be approved unless state regulators were sure that "consumers receive the protections they deserve," California Insurance Commissioner Steve Poizner said Wednesday.

An $85-billion loan from the Federal Reserve bought New York-based AIG time to right itself financially, at least partially by selling off valuable assets over the next two years. All decisions, however, must be approved by the U.S. government, which took an 80% stake in the $1-trillion conglomerate.

Individual units could be sold if they fetch high prices or kept because of their strong cash flow, experts said.

Insurance industry observers are sure there will be a sell-off of some of AIG's life, property and commercial insurance units. But aviation experts remain less certain about the fate of the company's giant aircraft leasing business.

Steven Udvar-Hazy, the co-founder of the unit who sold it to AIG in 1990 for $1.3 billion, is reportedly scrambling to put together investors to buy back the firm. International Lease Finance gives AIG a strong cash flow from a fleet worth more than $50 billion. Most of the planes are leased to foreign airlines.

Even though it has only 170 employees, International Lease Finance posted net income of $604 million on revenue of $4.73 billion in 2007.

Some analysts said that the government might push to keep the unit because of the much-needed cash flow and the value of the aircraft assets, which can be used as collateral to borrow more money. But selling the unit is also compelling because it could fetch $8 billion to $14 billion, according to various estimates by analysts. The number of potential buyers is small amid the current economic environment, analysts said, but one strong suitor has emerged.

Udvar-Hazy has strong reasons for buying back the business he helped create and grow into an aviation powerhouse. AIG no longer has the financial wherewithal or the credit ratings for the leasing unit to get favorable financing terms for the planes it purchases. In fact, its ties to the parent company are now viewed as a liability.

Worries about how the shakeout could affect International Lease Finance's credit quality helped send Boeing Co. shares lower Tuesday. The leasing unit is the biggest buyer for Boeing and of planes made by the European company Airbus. In all, the unit has orders for 179 passenger jets valued at $17.9 billion.

"It seems reasonable to expect . . . ILFC will be on the list of assets considered for sale," said Kathleen Shanley, an analyst for Gimme Credit.

Insurance sales are even more likely but would be complicated by extensive reviews by state regulators who have exclusive jurisdiction over insurance companies that operate in their jurisdictions.

AIG currently has five companies with legal headquarters in California and are primarily regulated by Poizner. Twenty-one more AIG insurance companies operate in the Golden State with rates and practices approved by the California Department of Insurance.

Poizner stressed that AIG's insurance companies licensed by California "remain solid," unlike the parent company, which lost billions of dollars on bad bets on unregulated, exotic, mortgage-related securities. Poizner said he has ordered his staff to make "monitoring AIG issues the No. 1 priority" and vowed to protect all insurance consumers.

The state, he said, has a number of safeguards in place to protect consumers by ensuring that insurance companies remain healthy and keep enough money in reserve to pay all claims. The commissioner also has the authority to seize a company so it can be rehabilitated or liquidated. The state's guaranty association would then pay any outstanding claims. Poizner said he expected strong interest in any AIG unit put on the block.

"AIG has a lot of quality insurance companies under its umbrella," he said.

Potential buyers of 21st Century, a 50-year-old company acquired by AIG in 2007, "are already trolling and circulating," said Brian Sullivan, the editor of Auto Insurance Reports, an Orange County-based trade newsletter. The company, which sold about $550 million worth of auto policies last year, is a pioneer in offering low-cost coverage by marketing directly to customers. Buying 21st Century, said Sullivan, is a way for a suitor "to become a big player in a big hurry." Workers' compensation and commercial property lines should also remain profitable either for a reorganized AIG or for a new buyer, experts said.

"We think the commercial insurance divisions of AIG are sound and likely to remain ongoing businesses regardless of how this shakes out," said Dennis Cusack, a San Francisco attorney who represents commercial policyholders in disputes with insurers.

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marc.lifsher@latimes.com

peter.pae@latimes.com

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