Feb. 24 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., may restructure its $150 billion rescue package for a second time in four months as the recession and slumping stock market cut the value of its assets.

AIG may convert the government’s preferred shares into common stock to reduce pressure on the company’s cash flow, a person familiar with the situation said yesterday. New York- based AIG pays a 10 percent dividend on preferred stock, and none on common shares. AIG fell in New York trading.

“Paying a huge dividend on the preferred only makes you bleed slowly over time, so this would help,” said Robert Haines, an analyst at CreditSights Inc. in New York. AIG is facing a “huge potential loss on its investment portfolio,” which could lead to credit-rating downgrades, he said.

AIG, once the largest insurer by assets, probably will report a fifth straight quarterly loss, casting further doubt on the company’s ability to repay the U.S. Executives at New York- based Citigroup Inc., previously the largest bank, also have discussed a share conversion as a way to quell capital-adequacy concerns, according to another person familiar with the matter.

Downgrades by Moody’s Investors Service and Standard & Poor’s may force AIG to post more than $7 billion in collateral to counterparties, the insurer said in a November filing. AIG’s units could also lose access to the federal commercial paper program if they are downgraded, the company said. Unprofitable insurers including Hartford Financial Services Group Inc. and Genworth Financial Inc. have already lost access to the program.

Absorbing Losses

An exchange to common shares may improve AIG’s standing with lenders and other counterparties based on prior agreements, Haines said.

“Common equity is a stronger former of capital as it absorbs losses first,” Haines said.

Details of a new rescue package probably will be disclosed next week when AIG posts fourth-quarter results, said the person, who declined to be identified because talks with the government are private. The company may report a record fourth- quarter loss of $60 billion on the decline of investment holdings, according to another person familiar with the situation.

AIG fell to 14 cents, or 26 percent, to 39 cents at 10:06 a.m. in New York Stock Exchange composite trading. The company’s market value has plunged 99 percent in the past 12 months to about $5.2 billion.

AIG also is exploring the possibility of filing for bankruptcy protection, which is an unlikely outcome, the CNBC television network reported yesterday.

Bids for Alico

AIG, led by Chief Executive Officer Edward Liddy, may try to repay as much as $60 billion of U.S. loans with a combination of cash, debt and equity, and by selling stakes in subsidiaries such as life-insurance units in Asia, the Wall Street Journal reported, citing unidentified people familiar with the plans.

“We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG’s financial challenges,” said AIG spokeswoman Christina Pretto, declining to be more specific.

A spokesman for the New York Fed wasn’t available for comment after regular business hours yesterday. Isaac Baker of the Treasury didn’t immediately return a call or respond to an e-mail after hours.

The company received bids from MetLife Inc. and Axa SA for its American Life Insurance Co. unit, which does business in more than 50 countries, said three people with knowledge of the situation. New York-based MetLife made a preliminary offer of as much as $11.2 billion, the people said. A rival approach from Axa in Paris excludes operations in Japan, Alico’s biggest market, they said.

Changing the Rules

AIG has so far secured agreements to raise more than $2.3 billion by selling assets.

The government, aware that market losses are deterring would-be buyers of AIG units, may change rules to make it easier for the company to sell assets, said the person, who declined to be identified. The insurer’s restructuring chief, Paula Rosput Reynolds, has said AIG may attract more bids in the current market environment if the company were allowed to accept a larger proportion of payment in stock, rather than cash.

North American insurers have posted more than $140 billion of credit-market losses and writedowns since the beginning of 2007, with AIG representing about 40 percent of the total, according to data compiled by Bloomberg.

Taxpayer Dollars

AIG had to seek an $85 billion federal loan in September after credit-rating downgrades left the company facing the possibility of more than $10 billion in collateral calls from debt investors who bought credit-default swaps from the insurer. The bailout, which includes handing the government an 80 percent stake in AIG, expanded to about $150 billion in November, partly to fund an entity designed to retire the swap contracts by purchasing the underlying assets from banks.

“While I anticipated that AIG would come back to the government begging for additional taxpayer dollars, I am disturbed that it has happened so soon,” said U.S. Representative Elijah Cummings, the Maryland Democrat who has criticized the insurer’s retention pay program, in a statement.

The government saved AIG from collapse to prevent losses at banks that did business with the insurer. “Counterparties around the world continue to have significant exposure to AIG, and market conditions continue to be fragile and sensitive to the potential disorderly failure of AIG,” the Fed said in a report published in November.

AIG, once the world’s largest insurer, operates in more than 100 countries and sells life, health and accident protection to individuals and businesses. It insures against some of the biggest risks, covering planes and commercial shipping and providing protection against terrorist attacks.

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

Last Updated: February 24, 2009 10:19 EST