American International Group has struck a deal in principle withfederal officials "designed to repay all its obligations toAmerican taxpayers" while positioning the company as "strong,independent and worthy of investor confidence."

AIG released details of its plan last week to pay back taxpayersfor bailing out the mammoth company, gradually allowing the federalgovernment to reduce its various forms of financial assistance.

The plan will allow the company to "concentrate our fullattention on managing our businesses for the benefit of all of ourstakeholders," according to Robert H. Benmosche, president andchief executive officer, who said AIG will "repay the taxpayerswith a profit."

"This is a pivotal milestone as we deliver on our long-standingpromise to repay taxpayers, and we thank the American people fortheir support," he added.

AIG said its $20 billion direct debt to the Federal Reserve Bankof New York and the $26 billion interest the FRBNY has in twospecial purpose vehicles will be repaid in full. Also as part ofthe plan, the company will issue common stock to the U.S. TreasuryDepartment.

The repayment of senior debt and conversion of common stock bythe Treasury are each expected to be done by the end of the 2011first quarter if regulatory approvals go through, AIG said.

The Treasury, which had owned 80 percent of AIG after thebailout, is to own 92.1 percent of the common stock of AIG after itconverts the $49.1 billion of preferred shares it has under theTroubled Asset Relief Program into about 1.66 billion shares ofcommon 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 forAIG's repayment and puts taxpayers in a considerably strongerposition to recoup our investment in the company," TreasurySecretary Timothy Geithner said in a statement.

To repay the FRBNY, AIG said it will use its own resources andproceeds from other assets–including an initial public offering ofAmerican International Assurance Company Ltd. on the Hong KongStock Exchange, subject to approvals and market conditions. AIGsaid it will also use proceeds from the $15.5 billion sale ofAmerican Life Insurance Company to MetLife Inc. TheALICO-to-MetLife transaction is expected to close during the 2010fourth quarter.

FRBNY also has about $26 billion in preferred interest in twospecial purpose vehicles. AIG said it will use $22 billion in TARPfunds to purchase an equal amount of interests in each SPV and givethem to the Treasury as part of the plan to allow the Treasury tosell stock to the public.

In a separate statement, AIG said it has entered into anagreement to sell Japan-based life insurance subsidiaries Star LifeInsurance Company and Edison Life Insurance Company to PrudentialFinancial Inc. for $4.8 billion–with about $4.2 billion coming incash. The transaction is expected to close during the first quarterof 2011, pending regulatory approvals.

This money will be put toward retiring the remainder of FRBNY'spreferred 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 thecompany.

But experts have already said the sale of stock has everythingto do with timing. If shares are sold quickly, it could drive downthe price and reduce the return. Should the Treasury get rid of itsstock in the company rapidly, AIG could face a credit downgrade,the experts warned.

Mr. Benmosche said that over the last year, AIG has soldnon-core units, bolstered its financial strength, improvedliquidity, increased risk management and stabilized core insurancebusinesses.

The company has also "de-risked" AIG Financial Products–the unitin charge of the credit default swaps that were blamed for thecompany's downfall, he added. When AIG was bailed out, this unit'sexposure to derivatives was $2 trillion. At the end of the secondquarter of this year, however, the exposure was reduced 70 percentto $602 billion, Mr. Benmosche noted.

The unit "will no longer pose a significant financial risk toeither AIG or the broader financial system," he said.

The federal government made more than $182 billion available toAIG about two years ago when it faced a liquidity crisis due to adowngrade in its credit rating, which required AIG to post morecollateral to its credit default swap trading partners. AIG said itowed the government $101.2 billion as of June 30.

Rating agency A.M. Best Company said the government'sinvolvement in AIG was never supposed to be permanent, therefore"the announcement of this final plan is not itself a trigger for arating action."

The ratings of all AIG subsidiaries remain unchanged. The issuercredit rating of "bbb" of AIG is unchanged, with a negativeoutlook.

"With the removal of this [government] support, AIG will need tostand on its own, reestablish itself in the capital markets,restore shareholder confidence (particularly with institutionalinvestors) and demonstrate its ability to maintain sufficientliquidity, which is no long accessible through government sources,"A.M. Best commented, adding that it would continue to monitor theexecution of the plan.

SECURITIES SUIT

In other AIG news, a federal judge in New York has denied arequest by the company to have a securities fraud class-actionlawsuit against it dismissed.

U.S. District Judge Laura Taylor Swain, in the U.S. DistrictCourt for the Southern District of New York, denied motions fromAIG and current and former executives and directors to dismiss thecase on various grounds.

The allegations presented by the plaintiffs in the case "supportan inference that is at least as compelling as any opposinginference that AIG and the defendants knew facts or had access toinformation suggesting that their public misstatements were notaccurate," wrote Judge Swain.

An investor group of plaintiffs led by the State of MichiganRetirement Systems has accused AIG and some of its executives anddirectors of "materially misstating the extent to which AIG hadaccumulated exposure to the subprime mortgage market through itssecurities lending program and its credit default swaps portfolio,"according to court documents.

"This decision is not a ruling on the merits and simply allowsthe case to proceed to discovery," Mark Herr, a representative forAIG, said in an e-mail. "We are confident that when all of thefacts come out, as they did during the course of the [Department ofJustice] and [U.S. Securities and Exchange Commission's] jointtwo-year investigation, it will be clear that no fraud occurred andshareholders were not misled as to any of the risks."

In June, the SEC ended its investigation of AIG and JosephCassano, former head of the AIG Financial Products unit thatmanaged the CDS portfolio, without filing charges. A month priorthe DOJ ended its investigation of the company and did not filecharges.

Mr. Cassano is named as a defendant in the class-action lawsuitalong with former chief executive Martin Sullivan and otherexecutives.

According to court documents, two confidential witnesses havesaid AIGFP could not economically hedge its CDS portfolio. However,executives such as Andrew Forster, an executive vice president withAIGFP, told investors in May 2007 that AIGFP could handle "theworst recession I can imagine," and that "it's actually fairly easyfor us to hedge any of the risks that we perceive."

The group of plaintiffs is comprised of investors who purchasedsecurities issued by AIG between March 16, 2006 and Sept. 16,2008–the date the federal government agreed to an $85 billionbailout of AIG.