Federal Tax Issue Puts Brakes on AIG, MetLife Deal
Feb. 18, 2010 – A $15 billion deal for the sale of a leading Asia-based insurance company being negotiated between MetLife and American International Group (AIG) officials has hit a tax-related snag.
Initially planned to be concluded by the end of February, the deal for AIG’s subsidiary American Life Insurance Company, popularly known as “Alico,” has been puts on hold while MetLife officials look into potential federal tax issues related to how Alico conducts its business overseas. Headquartered in Delaware but primarily doing business in Asia, Alico officials routinely withhold federal taxes from life insurance distributions made to its U.S.-based customers. But because Alico does most of its business overseas, the firm does not withhold federal taxes from distributions to non-U.S. citizens living in other nations.
Concerned U.S. officials might take umbrage at Alico’s practice, officials for MetLife and AIG are seeking a clarification on the matter from the U.S. Internal Revenue Service, Reuters reported yesterday. Company officials say the request for a clarification from federal officials is more of a formality and likely won’t delay the potential sale occurring by the end of the month. Selling Alico for $15 billion would be the largest single transaction done by AIG as company officials attempt to repay its staggering debt to U.S. taxpayers.
Alico mostly does business overseas in 50 nations and is one of the largest life insurance companies in lucrative, emerging Asian markets. Industry analysts say $15 billion would be a large amount to pay for a company valued at about $4 billion in 2008, but Alico has a large share of lucrative emerging life insurance markets in China and other parts of Asia. If MetLife does purchase Alico from AIG, the Federal Reserve Bank of New York would get about $9 billion as partial reimbursement for the taxpayer-funded bailout of the nearly bankrupted insurer in 2008. AIG would retain the remaining $6 billion.
The $9 billion would be used to buy back preferred shares of AIG stock that the federal government received as collateral for rescuing the ailing insurer in 2008. AIG officials also would allocate $16 billion to the Federal Reserve Bank of New York from the proceeds from the expected initial public offering of AIG’s Asian-based life insurance unit, American International Assurance (AIA), on the Hong Kong stock exchange later this year.
Formerly the world’s largest insurance company, AIG became the world’s most indebted insurer after federal officials last year agreed to extend the company an $85 billion loan in exchange for an 80 percent share of company stocks. Federal officials said allowing AIG to go bankrupt would have a devastating impact on U.S. and international financial markets and later revised lending terms, making it a $153 billion loan with a lower interest rate and longer repayment period.
Under the new plan, the Federal Reserve provided AIG $60 billion in loans and the U.S. Treasury another $40 billion so company officials could buy up preferred stock. Federal officials also approved $53 billion to purchase the company’s risky mortgage-backed assets and other debt contracts.