Oct. 3 (Bloomberg) -- American International Group Inc., the insurer forced to peddle businesses to repay an $85 billion government loan, will sell its life insurance and retirement operations in the U.S., Europe, Latin America and Japan.

AIG, once the world's largest insurer, will refashion itself into a global property and casualty company with a stake in an overseas unit that sells life policies in China, Korea and India, Chief Executive Officer Edward Liddy said today in a conference call. AIG may also sell its plane-leasing unit, consumer finance division, U.S. auto insurer, a reinsurance business and asset manager, he said.

``We won't exactly be the AIG of old, but we'll have a very secure position,'' Liddy said today in a conference call. ``This is going to be a formidable company that emerges from this.''

Selling life insurance operations is a reversal for Liddy, who previously said keeping that business was a priority. The firm has already borrowed about $61 billion on its credit line, two weeks after agreeing to the U.S. rescue that gives the government a majority stake. The loan went toward costs tied to credit-default swaps and securities lending and for cash needed because commercial paper markets froze, he said.

Liddy said he prefers ``brand-name'' buyers of ``large slices'' of AIG to hasten transactions and benefit customers and employees. Blackstone Group LP and JPMorgan Chase & Co., both based in New York, are coordinating the sales, AIG said.

`True Insurance Company'

``He's trying to refocus AIG to be a true insurance company,'' said Rob Haines, a debt analyst at CreditSights Inc. ``The question is, with current market conditions, will there be reasonable bids? If he doesn't generate enough cash to pay off the loan, then everything comes tumbling down.''

Standard & Poor's said it may cut AIG's credit grades because the amount the insurer has drawn down on its credit line is ``much larger'' than anticipated and there's a risk Liddy doesn't execute his plan, the ratings firm said today in a statement.

Moody's Investors Service downgraded the insurer's unsecured debt rating to A3 from A2. The ratings firm also reduced debt grades at AIG's International Lease Finance Corp., the largest lessor of planes to airlines, and the company's American General Finance Corp.

AIG's ``business diversification will be significantly reduced'' by the planned divestitures, Moody's said in a statement. AIG has borrowed ``heavily'' from the credit line, Moody's said.

AIG dropped 14 cents to $3.86 at 4:02 p.m. in New York Stock Exchange composite trading.

Derivatives

Liddy will also try to ``monetize'' assets in AIG's swaps portfolio. The derivatives, which provide protection for debt investors, plunged in value as the securities they guaranteed declined, saddling AIG with more than $25 billion in writedowns.

He also said he plans to sell AIG's remaining stake in Blackstone, manager of the world's largest buyout fund. AIG spent $150 million in 1998 for a 7 percent stake in Blackstone, which went public last year. The insurer recorded a $398 million gain last year from selling Blackstone shares.

AIG wants to keep a majority stake ``if at all possible'' in its American International Assurance Co. life insurance unit, Liddy said. That business operates in fast-growing markets including China, Singapore, Malaysia, Thailand, Korea, Vietnam, Indonesia and India. AIG, founded in Shanghai in 1919, previously projected annual earnings growth from life insurance of more than 20 percent in developing countries.

Can't `Be Re-created'

``The businesses we are retaining could not be re-created today,'' Liddy said in a conference call today.

The company's U.S. life insurance and retirement business was assembled by former CEO Maurice ``Hank'' Greenberg through acquisitions of SunAmerica Inc. in 1998 and American General in 2001. The other life subsidiary for sale, American Life Insurance Co., operates in parts of Europe, Latin America, the Caribbean, the Middle East, and Japan.

``We will look very favorably on preemptively priced offers, people who want to put in a very substantial offer on a property in order to move with us exclusively,'' Liddy said in a phone interview.

The U.S. business may sell for about $25 billion, according to Credit Suisse Group AG analyst Thomas Gallagher. The overseas life insurance division, including parts that will be kept, is worth about $62 billion, he said in Sept. 23 note to investors. AIG's property-casualty units took in $40 billion in revenue last year, the company said.

Payback

``The values that we will receive from the assets we intend to dispose will be more than enough to repay the Fed facility,'' said Liddy, the former Allstate Corp. CEO appointed by the government to run AIG.

Liddy has to reassure clients and employees of the insurer's long-term prospects while showing investors and the Treasury he can sell units to pay back debt. Liddy helped oversee the spinoffs of Allstate, Discover Financial Services, real estate broker Coldwell Banker Corp. and securities brokerage Dean Witter when he was at retailer Sears Roebuck & Co.

AIG almost collapsed last month from credit downgrades and writedowns tied to the U.S. housing slump. The insurer posted about $18.5 billion in net losses over three quarters, and its stock plunged more than 90 percent this year.

AIG's property and casualty units insure planes, shipping, factories and luxury homes and protect commercial property owners against terrorist attacks.

Transatlantic

The company also owns a home lender and reinsurer Transatlantic Holdings Inc. AIG got 4.3 percent of its revenue last year from airline leasing. Second-quarter operating income from the unit rose 85 percent to $352 million as the company expanded its fleet and charged more to rent planes.

Competitors may want to buy units that remained profitable as AIG was overwhelmed by losses at units that originate, insure and invest in home loans. Billionaire Warren Buffett told CNBC Sept. 24 that his Berkshire Hathaway Inc. may consider buying some AIG businesses, without naming which ones. AIG operates in more than 100 countries.

Greenberg is also interested in buying assets from AIG. Greenberg controlled the largest block of AIG stock before the takeover through personal holdings and investment firms. Greenberg wrote a letter to Liddy this week saying he wasn't contacted about possible sales.

`Open' Process

Liddy said today that AIG will divest assets in an ``open and transparent'' process. AIG has already agreed to sell its 50 percent ownership of London City Airport.

The insurer may sell AIG Investments, which managed $758.2 billion as of June, and arrange for the new owner to oversee some of AIG's holdings, Liddy said. The unit handles investments that back customer policies, plus $137.1 billion in client money.

``I'd like to get our investment activity back to simply investing our money,'' Liddy said.

The insurer may also unwind private equity investments, he said. AIG had private equity and hedge fund holdings of about $30 billion as of June 30.

AIG's mortgage insurer, United Guaranty Corp., may stop selling new policies, be said. The unit, which reimburses lenders when borrowers don't pay their debts, had a second-quarter underwriting loss of $564 million, a fourfold increase from a year earlier.

``If something emerges and someone wants to buy it, we'd be delighted to entertain it, we just don't think that will happen,'' Liddy said.

U.S. Loan

AIG has two years to repay the U.S. loan. The insurer agreed to payments for borrowed amounts of 8.5 percent plus the 3-month London interbank offered rate. On the unused balance, AIG will pay 8.5 percent. Three-month Libor rose today to 4.33 percent from 2.88 percent the day the deal was announced. The company said the U.S. will get preferred stock worth 79.9 percent of AIG.

The $1 trillion-asset company has about $48.7 billion in hard-to-value holdings, and had 116,000 employees as of Dec. 31, compared with 97,000 two years earlier. In addition to selling life insurance and protecting property, AIG owns or manages about $25.7 billion of real estate including residential, industrial and retail properties.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: October 3, 2008 19:39 EDT