AIG Gains Buyback Flexibility With AIA Sale, Bernstein Sa

American International Group Inc. (AIG) signage is displayed on the entrance to the building located at 72 Wall Street in New York on Jan. 13, 2011. Photographer: JB Reed/Bloomberg

American International Group Inc., the bailed-out insurer, may have more flexibility to buy back its stock from the U.S. government after divesting holdings of AIA Group Ltd., an analyst at Sanford C. Bernstein & Co. said.

AIG sold 1.72 billion shares of AIA, a Hong Kong-based life insurer, for HK$27.15 ($3.50) apiece and expects to take in about $6 billion, according to a statement from the seller. The proceeds will be used to lower obligations to the U.S. Treasury Department that are backed by AIG’s stake in the Asian insurer and other collateral.

Chief Executive Officer Robert Benmosche, 67, is seeking to decrease government ownership as he works to improve AIG’s return on equity after its bailout diluted the stake of private investors. The U.S. has the right to compel the insurer to sell assets if it doesn’t retire some obligations to the government by May 2013. AIG had $8.4 billion outstanding on special purpose vehicles backed by AIA shares and other assets as of Dec. 31.

AIG may have been “saving excess capital to meet that demand in the payoff scenario, if they had to,” Josh Stirling, an analyst with Bernstein, said yesterday in a phone interview. Raising cash from selling AIA stock means AIG “might actually be able to buy back shares, after all, from the government.”

AIG had $14 billion in liquidity at the parent-company level at the end of 2011, according to a regulatory filing. Mark Herr, a spokesman for the New York-based company, and the Treasury’s Matthew Anderson declined to comment.

Government’s Stake

A buyback may take place alongside a Treasury share sale, said Stirling. The government is seeking to reduce its AIG holdings at a profit after selling 200 million shares in a public offering in May for $29 apiece. The U.S. hasn’t said how many offerings may be needed to get rid of its stake.

“Chipping away at it kind of makes sense, as opposed to telegraphing it for three months and then having everybody sell against the stock,” said Stirling, who has a “market perform” rating on the insurer.

The government needs to average at least $28.72 a share to recoup its investment. AIG closed above that price on Feb. 28 for the first time since July. The insurer fell 2.3 percent to $29.68 at 9:34 a.m. in New York.

AIG’s board authorized a $1 billion buyback in November. As of Dec. 31, the company had used $70 million to repurchase shares. Chief Financial Officer David Herzog said the company expected to complete the buyback in the “foreseeable future” on a Feb. 24 earnings call with analysts. The U.S. still holds a 77 percent stake in AIG.

AIA Shares

The insurer still holds about 19 percent of AIA after the stock sale. AIG is prohibited from selling that stake until Sept. 4, according to the statement.

AIA plunged 8.4 percent to HK$26.75 in Hong Kong today, the most since September 22, as the shares were sold at the lower end of a target range and 7 percent below the closing price on March 2. Trading was suspended yesterday as the deal priced.

Jeffrey Hurd and Jay Wintrob, two AIG-nominated non-executive directors, will resign from AIA’s board once the placement is completed, since the U.S. insurer will no longer hold a controlling stake, the Hong Kong-based company said in a separate statement.

AIG sold about two-thirds of AIA in a 2010 initial public offering to raise money to repay its bailout. The 2008 rescue, which swelled to $182.3 billion, was revised at least four times to extend more credit and lower the interest charged.

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