| NEW YORK
NEW YORK American International Group Inc and the U.S. government agreed on Thursday agreed on a plan that would accelerate the payback of bailout money and could yield a profit for taxpayers but also increase their risk.
The plan comes a little over two years after AIG was first rescued with an aid package that ballooned to $182.3 billion. The plan allows the Federal Reserve Bank of New York to be repaid in full and ends its involvement in AIG, leaving AIG to deal with just the Treasury Department, while simplifying the bailout structure.
The Treasury will convert some of its AIG securities into common shares, raising its stake in the insurer to 92.1 percent from nearly 80 percent. That stake will be sold off over time.
The Treasury also will effectively buy out the Fed's interest in two large AIG units that are being sold.
The plan could lead to a loss for taxpayers if the stock price falls below roughly $30, at which the Treasury will break even, or if the company fails, as common shares sit lower in the capital structure.
AIG shares closed up 4.4 percent, or $1.65, to $39.10.
"Now the debate is how much the government will make on AIG," Chief Executive Robert Benmosche said in an interview. "Is it a billion, is it 10 billion? They are not talking about a $30 billion loss anymore."
A senior Obama administration official said the plan could yield a profit of around $16.5 billion for taxpayers, compared to a previously estimated loss of about $45 billion.
The deal, which is expected to close by the end of the 2011 first quarter, shows the insurer is making progress in disentangling itself from the government and positions the company to tap the capital markets again.
The announcement of the plan comes as the government faces pressure to show it is extracting itself from the financial industry, which was offered more than a trillion dollars of taxpayer support in 2008.
When Americans go to the polls for mid-term elections in November, the state of the financial system and the economy will be a big issue.
The Troubled Asset Relief Program, set up amid the 2008 financial crisis to shore up the industry, expires on Sunday.
Benmosche said the timing of the deal helps AIG avoid another "firestorm of negative publicity."
The Treasury will get about 1.66 billion AIG common shares, worth $64.9 billion at Thursday's closing share price, in exchange for the $49.1 billion of AIG preferred shares and accrued interest it now holds. The strategy is similar to one the government has been following in exiting Citigroup Inc.
Benmosche said the Treasury took the time to understand the value of AIG's business, book value and earnings potential before making the move, which makes for an easier exit as the market for common shares is more liquid.
The Treasury had estimates ranging from a year to 18 months for selling down its stake in AIG once the exchange is completed, Benmosche said.
Former AIG CEO Maurice "Hank" Greenberg, who has been a critic of the bailout terms, told Reuters Insider he was unhappy with the plan and that the conversion creates "a huge overhang" on the stock.
"What's going to drive the stock up? Their job is not to hold it; it is to sell it," Greenberg said.
The plan also calls for AIG to repay $20 billion under a Fed credit facility, using funds from operations and disposal of assets like its Asian life insurance businesses -- American Life Insurance Co (Alico) and American International Assurance (AIA).
The exchange of the Treasury's preferred stock will not be executed until the Fed credit facility is repaid in full. Morgan Stanley has been advising the Fed throughout the restructuring.
The Fed also owns preferred shares worth about $26 billion in AIA and Alico. AIG plans to draw down up to $22 billion from an existing Treasury equity line to buy out part of that stake, and then transfer the shares to the Treasury.
AIG plans to use the proceeds from future asset sales, including the sale of two Japanese life insurance units, to retire the remainder of the Fed's stake.
Prudential Financial Inc clinched a deal for the Japan units -- AIG Star Life Insurance Co Ltd and AIG Edison Life Insurance Co -- for $4.2 billion in cash.
AIG Credit Facility, formed in January 2009 to hold the government's stake in the company, will be dissolved, further reducing the number of parties at the table.
"As we move into 2011, we will be dealing with one owner in the U.S. government instead of several," Benmosche said.
The plan also has a sweetener for existing shareholders, who will see their holdings diluted. AIG plans to issue them up to 75 million warrants with a strike price of $45 per share.
Benmosche said it was a way to be fair to them, "if it is such a windfall for the government at the expense of the current shareholders."
Benmosche, speaking at his office at AIG's headquarters in Manhattan, said the plan creates clarity for clients and employees. Having the Fed out, which took a senior position in the capital structure of AIG, would allow the company to again persuade banks to give it loans.
AIG is already in talks with banks and expects to have about $3 billion of credit lines as the Fed exits, Benmosche said.
AIG also plans a $2.5 billion equity offering, including issuance of new shares, and a small debt sale by March, a source familiar with the situation said.
AIG is also moving forward on asset dispositions, including the $15.5 billion sale of Alico to MetLife Inc by the end of the year, and listing of AIA in Hong Kong next month. It plans to make the domestic life and global property-casualty operations core to the company going forward.
Benmosche said the company expects about $12 billion in proceeds from AIA listing, although the valuation was being worked out. He dismissed concerns about the offering that surfaced after U.S. insurer Liberty Mutual Agency Corp postponed a $1.2 billion IPO, saying the businesses were different.
Greenberg said the asset sales reduced AIG's diversification and added risk, especially because property-casualty business is volatile.
"If I had the choice, I would sell the domestic life business rather than the Asian business (AIA)," Greenberg said.
Benmosche said AIG may at some point consider a partial IPO of other businesses, such as aircraft lessor International Lease Finance Corp and mortgage insurer United Guaranty. It also would be open to a sale of the units at the right time and price.
AIG also plans to absorb whatever is left at AIG Financial Products, the unit behind its near collapse, into the parent company and further reduce the risk, Benmosche said.
"The question becomes more about how do we get AIG to have access to the capital markets and how do we begin to show AIG as a strong investment-grade company that's single A or better," Benmosche said.
AIG's shares have risen 30 percent this year, compared with an 8 percent rise in the S&P Insurance index.
(Reporting by Paritosh Bansal; Additional reporting by David Lawder and Dan Wilchins; Editing by John Wallace and Carol Bishopric)