By Hugh Son and James Sterngold
(c) 2010 Bloomberg News
Monday, September 27, 2010; 11:47 AM
Sept. 27 (Bloomberg) -- The U.S. Treasury Department may announce plans as early as this week to return American International Group Inc. to independence and recoup taxpayer money from the insurer's bailout, according to three people with knowledge of the talks.
The biggest part of that strategy is for Treasury to begin converting its $49 billion preferred stake into common stock for sales by the first half of next year, said the people, who declined to be identified because the negotiations are private. The timing of an announcement depends on the pace of talks between regulators and the New York-based insurer, and discussions may extend beyond this week, the people said.
The government is seeking to dispose of its AIG stake as Chief Executive Officer Robert Benmosche, 66, prepares divestitures of two non-U.S. divisions that he said would largely repay the firm's Federal Reserve credit line. MetLife Inc. said this month its purchase of American Life Insurance Co., for about $15.5 billion, is "on track" to be completed on Nov. 1. AIG may hold an initial public offering of another business, AIA Group Ltd., in October.
The insurer's objective is to "repay the taxpayers and position AIG, over time, as a strong, independent company worthy of investor confidence," said Mark Herr, a spokesman for the firm. "We have been in discussions with the U.S. Treasury, the Federal Reserve Bank of New York and trustees of the AIG Trust over the terms of the government's exit from AIG."
AIG jumped $2.07, or 5.7 percent, to $38.54, at 11:32 a.m. in New York Stock Exchange composite trading. It was the second- biggest advance in the Standard & Poor's 500 Index, trailing only Southwest Airlines Co., which struck a deal to buy AirTran Holdings Inc.
The insurer and its government overseers are set to discuss terms of the exit strategy by Sept. 29 and may issue a statement after that meeting, said one of the people. Mark Paustenbach, a Treasury spokesman, and Jack Gutt of the New York Fed declined to comment.
AIG would be required to hold at least a 30 percent stake in AIA for the first year after the Asian unit's listing, according to a preliminary IPO document sent to fund managers today. AIA shares are slated to start trading on the Hong Kong stock exchange on Oct. 29.
Hong Kong-based AIA will probably boost pretax operating profit to at least $2 billion for the fiscal year ending Nov. 30, AIG disclosed Sept. 25 after providing the forecast to certain analysts.
AIG, once the world's largest insurer, was first rescued in September 2008 by the Federal Reserve. After three revisions, the firm's $182.3 billion lifeline includes a Fed credit facility, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by AIG.
The company, which in addition to the Treasury's preferred stake owes about $20 billion on the Fed credit line, is the only insurer yet to repay its Troubled Asset Relief Program rescue funds. Hartford Financial Services Group Inc. and Lincoln National Corp. repaid their bailouts, and this month Treasury raised more than $900 million selling warrants in the companies.
Treasury Secretary Timothy F. Geithner said last week that the U.S. would "largely get the taxpayers' money back" from TARP. Estimates for losses on the $700 billion program are shrinking, Geithner said, citing a Congressional Budget Office estimate that TARP would cost $66 billion, compared with $105 billion in an earlier Treasury report.
AIG gained about 22 percent in New York Stock Exchange trading this year through Sept. 24. It slipped 4.5 percent last year and plunged 97 percent in 2008, the year writedowns tied to soured housing-market bets forced the insurer to take a rescue.
AIG's plan to gain independence "could result in the issuance of a large number of additional shares of AIG common stock," the company said in the Aug. 6 filing. The new securities "could result in significant dilution to AIG's current shareholders," the firm said.
The government's exit from AIG could be modeled after that of New York-based Citigroup Inc., in which the government sold shares through a set trading program, Benmosche has said. Citigroup is still 18 percent owned by Treasury.
AIG's trustees, a three-person panel, wield the government's almost 80 percent stake in the insurer and control votes on asset sales, mergers and the selection of top executives.
Treasury added two members to AIG's board of directors this year under an agreement that allowed for the appointments if the company skipped dividend payments on the government's preferred shares for four straight quarters.
The entire proceeds from the AIA share sale will go to AIA Aurora LLC, an AIG special purpose vehicle, to pay down preference units with a liquidation value of $16 billion owned by the New York Fed, said another preliminary IPO document sent to fund managers and seen by Bloomberg today.