American International Group Inc. (AIG) has released details of its plan to pay back taxpayers for bailing out the mammoth company, gradually allowing the federal government to reduce its various forms of assistance to AIG.
The plan will allow AIG to "concentrate our full attention on managing our businesses for the benefit of all of our stakeholders," said Robert H. Benmosche, president and chief executive officer, in a statement.
The chief executive said he also believes AIG will "repay the taxpayers with a profit."
AIG said its $20 billion direct debt to the Federal Reserve Bank of New York (FRBNY) and the $26 billion in interest the FRBNY has in two special purpose vehicles (SPVs) will be repaid in full.
Also as part of the plan, the company will issue common stock to the U.S. Treasury Department.
The repayment of senior debt and conversion of common stock by the Treasury are each expected to be done by the end of the 2011 first quarter if regulatory approvals go through, AIG said.
The Treasury, which had owned 80 percent of AIG after the bailout, is to own 92.1 percent of the common stock of AIG after it converts the $49.1 billion of preferred shares it has under the Troubled Asset Relief Program (TARP) into about 1.66 billion shares in common stock.
The Treasury will then sell the shares to the public over time. This step will not occur until the FRBNY is repaid, AIG said.
The exit strategy "dramatically accelerates the timeline for AIG's repayment, and puts taxpayers in a considerably stronger position to recoup our investment in the company," Treasury Secretary Timothy Geithner said in a statement.
To repay the FRBNY, AIG said it will use its own resources and proceeds from other assets, including an initial public offering of American International Assurance Co. Ltd (AIA) on the Hong King Stock Exchange--subject to approvals and market conditions. AIG said it will also use proceeds from the $15.5 billion sale of American Life Insurance Co. (ALICO) to MetLife Inc.
The ALICO-to-MetLife transaction is expected to close during the 2010 fourth quarter.
The FRBNY also has about $26 billion in preferred interest in two special purpose vehicles (SPV). AIG said it will use $22 billion in TARP funds to purchase an equal amount of interests in each SPVs and give them to the Treasury as part of the plan to allow the Treasury to sell stock to the public.
In a separate statement AIG said it has entered into an agreement to sell Japan-based life insurance subsidiaries Star Life Insurance Co. and Edison Life Insurance Co. to Prudential Financial, Inc. for $4.8 billion--about $4.2 billion in cash. The transaction is expected to close during the 2011 first quarter, pending regulatory approvals.
This money will be put toward retiring the remainder of the FRBNY's preferred interest in the SPVs, AIG said.
In a message from Mr. Benmosche, the chief executive said that, considering how well AIG's operating companies have rebounded, taxpayers can expect to profit from their support of the company.
But experts have already said the sale of stock has everything to do with timing. If shares are sold quickly, it could drive down the price and reduce the return. Should the Treasury gets rid of its stock in the company rapidly, AIG could face a credit downgrade, the experts said.
Mr. Benmosche said that over the last year AIG has sold non-core units, improved its financial strength, improved liquidity, increased risk management and stabilized core insurance businesses.
The company has also de-risked AIG Financial Products, the unit in charge of the credit default swaps that were blamed for the company's downfall, he added. When AIG was bailed out, this unit's exposure to derivatives was $2 trillion. At the end of the second quarter this year, the exposure was reduced 70 percent to $602 billion, Mr. Benmosche said.
The unit "will not longer pose a significant financial risk to either AIG or the broader financial system," he said.
The federal government made more than $182 billion available to AIG about two years ago when it faced a liquidity crisis due to a downgrade in its credit rating, which required AIG to post more collateral to its swap trading partners. AIG said it owed the government $101.2 billion as of June 30.