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AIG gets closer to independence

AIG gets closer to independence

NEW YORK—American International Group Inc. took another significant step toward ending its bailout saga with last week's sale of 300 million shares, though full independence for the company remains far off, observers say.

In last Tuesday's share sale, which raised about $9 billion, New York-based AIG sold 100 million shares while the U.S. Treasury Department sold 200 million shares, and underwriters of the sale have the option to buy an additional 45 million shares.

Depending on the outcome of that overallotment, the stock sale reduces Treasury's ownership stake in AIG to at most 77% from the 92% it held as a result of the federal bailout of AIG.

The deal priced late Tuesday at $29 per share. One day after the sale, AIG shares were trading at $28.28. They ended the week at $28.88, down 6.2% from the previous week's close.

The offering price valued AIG shares at more than one-third less than where they had traded in January, when Treasury announced that it planned to exit its investments in AIG over time depending on market conditions.

“The sale didn't meet expectations,” said David Merkel, a principal at Baltimore-based investment advisory firm Aleph Investments L.L.C. While AIG did make an effort to communicate what it has been doing to strengthen the business, it encountered a “"show me” response from investors. “There's a little distrust,” he said.

Market players were concerned when AIG made changes in recent months in its core commercial property/casualty unit, Chartis Inc., including boosting reserves by $4.6 billion in February. Then at the end of March, AIG named Peter D. Hancock CEO of Chartis, replacing Kristian P. Moor, who was named vice chairman. And in April, AIG said it agreed to transfer the bulk of Chartis' legacy asbestos-related liabilities to Omaha, Neb.-based reinsurer Berkshire Hathaway Inc.'s National Indemnity Co.

Why are AIG and Treasury selling shares now?

“One, the government was able to sell a material position at a slight gain,” said a market source close to the share sale who asked for anonymity.

He also said “it's in everyone's interest” to increase the number of AIG shares in the market. A stock's price can swing dramatically when only a few of its shares are changing hands.

Goldman, Sachs & Co., J.P. Morgan Securities L.L.C. and other financial services firms involved in the deal did not respond to requests for comment. A spokesman for AIG declined comment.

Things have looked up for AIG since June 2009, when the Congressional Budget Office estimated that TARP would end up subsidizing AIG by about $35 billion. In March of this year, the CBO lowered its estimate to $14 billion.

While it remains to be seen how much Treasury's holdings in AIG will be worth down the line, it's clear that the company has already returned a significant portion of its government aid, in large part by selling off American Life Insurance Co. for $16.2 billion in November and raising about $17.8 billion by selling two-thirds of its shares in Asian life insurer AIA Group Ltd. in a public offering last year.

Treasury and the Federal Reserve Bank of New York's remaining outstanding investments in AIG totaled about $82.5 billion before the offering, which reduced that number by about $5.8 billion.

The share offering is “another step toward independence for AIG,” said Bruce Ballentine, a senior credit officer at Moody's Investors Service Inc. in New York.

Julie Burke, managing director at Fitch Ratings Inc. in Chicago, said AIG has made “tremendous progress” over the past year in its efforts to restructure and improve its operations.

But AIG has far to go before it can attain complete liberty.

After last week's stock deal, Treasury said in a statement that its remaining investment in AIG through TARP amounts to roughly $53.1 billion. It's an open question as to when—and for how much—Treasury will unload its approximately 1.46 billion remaining shares of AIG common stock.

Mr. Merkel noted that the government can't sell any additional shares for the next four months. Treasury agreed with the investors in this first round not to rapidly add AIG shares to the market, as doing so could hurt the value of shares already on the market.

When Treasury sells AIG stock again is “going to be proportionate to how much demand there is for shares and how much the U.S. government is willing to accept that they lose money,” Mr. Merkel said.

David Paul, a principal at Alirt Insurance Research L.L.C. in Windsor, Conn., said the key issue is what happens once the government exits AIG ownership entirely.

“It's a question of how well they clean up their business and how profitable it will be going forward,” Mr. Paul said.