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

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

The plan will allow the company to "concentrate our full attention on managing our businesses for the benefit of all of our stakeholders," according to Robert H. Benmosche, president and chief executive officer, who said AIG will "repay the taxpayers with a profit."

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

AIG said its $20 billion direct debt to the Federal Reserve Bank of New York and the $26 billion interest the FRBNY has in two special purpose vehicles 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 into about 1.66 billion shares of 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 Company Ltd. on the Hong Kong 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 Company to MetLife Inc. The ALICO-to-MetLife transaction is expected to close during the 2010 fourth quarter.

FRBNY also has about $26 billion in preferred interest in two special purpose vehicles. AIG said it will use $22 billion in TARP funds to purchase an equal amount of interests in each SPV 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 Company and Edison Life Insurance Company to Prudential Financial Inc. for $4.8 billion–with about $4.2 billion coming in cash. The transaction is expected to close during the first quarter of 2011, pending regulatory approvals.

This money will be put toward retiring the remainder of 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 get rid of its stock in the company rapidly, AIG could face a credit downgrade, the experts warned.

Mr. Benmosche said that over the last year, AIG has sold non-core units, bolstered 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 of this year, however, the exposure was reduced 70 percent to $602 billion, Mr. Benmosche noted.

The unit "will no 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 credit default swap trading partners. AIG said it owed the government $101.2 billion as of June 30.

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

The ratings of all AIG subsidiaries remain unchanged. The issuer credit rating of "bbb" of AIG is unchanged, with a negative outlook.

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

SECURITIES SUIT

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

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

The allegations presented by the plaintiffs in the case "support an inference that is at least as compelling as any opposing inference that AIG and the defendants knew facts or had access to information suggesting that their public misstatements were not accurate," wrote Judge Swain.

An investor group of plaintiffs led by the State of Michigan Retirement Systems has accused AIG and some of its executives and directors of "materially misstating the extent to which AIG had accumulated exposure to the subprime mortgage market through its securities lending program and its credit default swaps portfolio," according to court documents.

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

In June, the SEC ended its investigation of AIG and Joseph Cassano, former head of the AIG Financial Products unit that managed the CDS portfolio, without filing charges. A month prior the DOJ ended its investigation of the company and did not file charges.

Mr. Cassano is named as a defendant in the class-action lawsuit along with former chief executive Martin Sullivan and other executives.

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

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

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AIG Unveils Plan To Repay Taxpayers For Federal Bailout Funds, With A Profit

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