AIG starts talks on govt exit, tops Street view

AIG, whose shares rose as much as 5.7 percent on Friday, is nearly 80 percent owned by the U.S. government after a $182.3 billion bailout. It also sees converting the Treasury Department's preferred stake into common shares as one option to eventually end the government role in the insurer, CEO Robert Benmosche told Reuters.

The size of that and how that will work still needs to be thought through, Benmosche said in a telephone interview. But the key to having that option is that we have to have a company that is investment grade on its own. So we are shooting for a single A.

Benmosche's comments come as the company said that in recent weeks it had begun talks about a strategy to allow the government to exit its owner relationship. Details of a planned timetable for the exit were not given.

AIG, once the world's largest insurer, nearly collapsed in September 2008 from credit default swaps that left it on the hook for tens of billions of dollars in payouts to some of the biggest U.S. and European banks.

After the government rescue, it has been divesting assets to repay taxpayers, who are still owed more than $100 billion.

As of June 30, AIG had outstanding net borrowings under a Federal Reserve Bank of New York credit facility of $20.5 billion, plus accrued interest and fees of $6 billion. The Treasury held another $49.1 billion in preferred shares.

AIG will begin negotiating an exit of the Treasury's equity stake once it has clarified how the Fed's credit facility will be paid down, Benmosche said.

AIG is already on its way to divesting some assets to pay down the government debt.

Benmosche said AIG was working to do a public offering of its Asian life unit AIA as quickly as possible.

AIG revived plans for an IPO of the unit after a failed sale to Britain's Prudential Plc, which paid AIG a termination fee of $228 million.

If we can make it in the fourth quarter that will be great, Benmosche said.

AIG's aircraft leasing unit, International Lease Finance Corp, plans to go to the capital markets in the next couple of weeks to raise just under $4 billion, Benmosche said. The funds will be used to pay down the Fed's loans that AIG took since the fourth quarter to prop up ILFC.

AIG expects to close on the sale of another foreign life insurance unit to MetLife Inc in the fourth quarter.

Benmosche, who recently muscled out Chairman Harvey Golub from the AIG board after disagreements, said the board and I are working very well together. And I think things are proceeding very well.

AIG's shares were up 2.7 percent at $40.97 on Friday afternoon on the New York Stock Exchange, off an earlier high at $42.19. Through Thursday, the stock had risen 33 percent this year, outperforming a 7 percent gain in the S&P Insurance Index.

STABILITY IN CORE OPS

AIG reported second-quarter earnings of $1.3 billion, or $1.99 per share, excluding special items, up from $1.1 billion, or $1.71 per share, a year earlier.

Analysts on average had expected 99 cents per share, according to Thomson Reuters I/B/E/S.

Things were pretty stable, Morningstar analyst Bill Bergman said. Stabilization doesn't mean growth and healthy growth, but it appears to be laying a basis for that.

On a net basis, AIG reported a net loss of $2.7 billion compared with a year-earlier net profit of $1.8 billion.

The net loss was primarily due to a $3.3 billion noncash goodwill impairment charge from the pending sale of American Life Insurance Co.

AIG's general insurance unit, Chartis, reported operating income of $955 million before net realized capital gains, down from $1 billion a year earlier.

Chartis incurred $287 million of catastrophe losses in the quarter, including from floods in the U.S. Southeast, the explosion at BP's Deepwater Horizon oil rig, and the Icelandic volcano.

There is healthy, stable operating income in the general insurance operations, Bergman said.

U.S. life insurance and retirement services, called SunAmerica Financial Group, reported operating income of $1.1 billion before net realized capital gains, up from $254 million a year earlier.

Benmosche sees Chartis and SunAmerica forming AIG's core.

American General Finance's operating loss narrowed to $11 million from $202 million. AIG said it was exploring strategic alternatives for the consumer finance unit, including a potential sale.

AIG Financial Products, the unit behind the insurer's spectacular downfall in 2008, reduced the notional amount of its derivative portfolio to about $602.4 billion at June 30, down 36 percent from the end of last year.

Mortgage guaranty insurance unit United Guaranty Corp posted pretax income of $226 million, reversing a year-earlier loss of $488 million.

(Reporting by Paritosh Bansal; editing by John Wallace, Lisa Von Ahn and Matthew Lewis)