NEW YORK—American International Group Inc. received a key credit rating upgrade last week amid several positive developments for the insurer.

AIG President and CEO Robert H. Benmosche also expressed confidence in the New York-based insurer's ability to repay its federal debt before the 2013 expiration of its credit line, telling Reuters last week that the pending sale of its two life insurance units will bring the company to a point at which it can begin formal discussions with the government about an exit.

Separately, a federal judge in New York last week dismissed a shareholder lawsuit accusing current and former AIG directors of ignoring “red flags” that led to the company's near collapse in 2008, alleviating a significant legal burden, observers say.

On Thursday, New York-based S&P affirmed its A-/A-1 counterparty ratings on AIG and a higher A+ counterparty credit and financial strength ratings on its insurance subsidiaries, Chartis Inc. and SunAmerica Financial Group. S&P warned, however, that it was maintaining a negative outlook on AIG and its subsidiaries due to “the likelihood that pressure on the companies' operating performance could build.”

But perhaps more importantly, some analysts said, the rating agency also upgraded AIG's stand-alone credit profile to BB from BB-, with a positive outlook. The stand-alone grade reflects the New York-based insurer's creditworthiness absent government support, S&P said.

The revised assessment “reflects the company's continued momentum in re-establishing its multiline insurance market presence through its Chartis and SunAmerica operation, good progress in the unwinding of AIG Financial Products Corp., and the improved liquidity position of its noninsurance operations,” S&P analyst Kevin Ahern said in a statement.

In March, AIG struck deals to sell its two biggest non-U.S. life units, American Life Insurance Co. and AIA Group Ltd., to Metlife Inc. and Prudential P.L.C., respectively, for a combined total of about $51 billion. It pledged the proceeds to pay down debts on a credit line it received from the Federal Reserve as part of its $182.3 billion rescue package. The transactions are expected to close by year-end, the companies said.

S&P said, if successful, the two acquisitions will improve AIG's financial profile. After the close of the transactions, the rating agency may further revise AIG's stand-alone profile upwards by two notches, to investment grade, it said.

Mr. Benmosche said the sales of ALICO and AIA will make a significant dent in its federal debt.

“We are well on our way to paying back the Federal Reserve” with the sales of ALICO and AIA Group Ltd. “We are beginning to show the appropriate returns you'd expect of a company of our stature.”

AIG last week completed the sale of its third-party asset management business, renamed PineBridge Investments, to Hong Kong-based Pacific Century Group for $277 million in cash, the companies said.

Separately, AIG last month raised $452 million through the sale of its remaining ownership of reinsurer Transatlantic Holdings Inc.

Mr. Benmosche last week told the New York Times he viewed the S&P report as vindication of the strategy he devised after becoming AIG chief last year, essentially slowing the pace of asset sales until improved market conditions could fetch higher values for the units.

Analysts viewed S&P's rating action as positive. “They got some big endorsements, and that kind of recognition doesn't come easy,” said John L. Ward, CEO of Cincinnatus Partners L.L.C. in Cincinnati. Mr. Ward said the developments should “offer reassurance” to insurance buyers that there is further stability, and perhaps “create a calming effect,” he said.

Bill Bergman, an analyst with Morningstar Inc. in Chicago, said Mr. Benmosche's reported statements about repaying government debt by 2013 “is the first time we've really heard anything that specific. You have to respect that. I think the needle is moving in the right direction.”

However, analysts noted AIG will continue to face challenges. After the sale of ALICO and AIA, “the size and scope of available units to sell will drop off significantly, making it difficult to generate really large sums of money” to put toward the remaining debt, Mr. Ward said.

Even after the sale of ALICO and AIA, the insurer will still owe roughly $70 billion in various forms of aid, “and that's a pretty steep hill to climb,” he said.

In addition, AIG's “underwriting profitability has been weak relative to its peers” and “there is still loss reserve uncertainty,” said Mr. Bergman.

Despite Mr. Benmosche's reported optimism about freeing the insurer from government control, the company remains under close supervision by the federal government. Last week, the U.S. Treasury Department named two people to serve on AIG's board of directors: former chief executive of E*Trade Financial Corp. Donald H. Layton, and former chief executive of Electronic Data Systems Corp. Ronald A. Rittenmeyer. The government had the right to make the appointments because AIG failed to pay dividends for four quarters on AIG preferred stock held by the Treasury Department, the agency said in a statement.

Meanwhile, a legal victory for AIG last week brings the insurer one step closer to resolving nearly all outstanding litigation.

U.S. District Judge Laura Taylor Swain dismissed a shareholder derivative suit against AIG and its directors, accepting AIG's argument that the plaintiffs failed to meet legal requirements, namely “they did not make a demand on the company's board of directors prior to bringing the action,” according to court documents.

The plaintiffs—led by the Louisiana Municipal Police Employees Retirement System pension fund—accused executives of ignoring the potential for catastrophic losses stemming from exposure to credit default swaps, largely tied to subprime mortgage-related debt, through its AIG Financial Products unit.

The suit sought remedies on behalf of AIG, including restitution and “extraordinary equitable relief.”

Mark Herr, a spokesman for AIG, said the company was pleased with the ruling.