AIG sells $6 billion AIA shares to help repay U.S. rescue

American International Group Inc., the insurer that received bailout after the collapse of Lehman Brothers Holdings Inc., is selling $6 billion of AIA Group Ltd. shares to help pay back the U.S. government.

The insurer is offering about 1.7 billion AIA shares at HK$27.15 to HK$27.50 a share to institutional investors who weren’t identified, according to a sales document obtained by Bloomberg. New York-based AIG will hold about 19 percent of AIA after the stock sale.

AIG was rescued in September 2008 after the collapse of the subprime housing market and Lehman triggered credit rating downgrades of the insurer. The bailout swelled to as much as $182.3 billion, much of which the AIG has repaid through asset sales. The Treasury still holds about three-quarters of the company’s stock and other AIG-related assets, backed by collateral including the AIA stake.

“AIG needs the money to repay the government,” said Andrew Sullivan, principal sales trader at Piper Jaffray Asia Securities Ltd. in Hong Kong. “For holders of the Hong Kong- listed company, it starts to remove a known overhang so it’s a long-term positive, but short term it hurts.”

AIG sold about two-thirds of the Hong Kong-based life insurer in a 2010 initial public offering. Its stake before the latest share sale has a market value of about $15 billion. Proceeds from the latest AIA share sale will be used to lower $8.4 billion AIG owes the Treasury to redeem interests in special-purpose vehicles related to its rescue.

Independent Entity

After the IPO, AIA “has to be run as an independent entity and has to be seen as being run as an independent entity,” said Nicholas Yeo, the Hong Kong-based head of China and Hong Kong at Aberdeen Asset Management Plc, which oversees about $265 billion. AIG’s share sale “is not something that bothers investors. When it was IPO-ed, investors already expected it to be run as it is, with or without AIG.”

AIA’s Hong Kong-traded shares are suspended today because of the share sale, it said in a statement to the city’s stock exchange. The insurer has climbed 27 percent since the close on its first day of trading on Oct. 29, 2010. AIG surged 4.6 percent to $31.16 at 10:19 a.m. in New York, the highest intraday price since May.

AIG has divested more than $50 billion in assets to repay the government rescue, including non-U.S. life insurers, a consumer lender and other businesses. The firm sold a $500 million stake in Blackstone Group LP in a block trade last week, according to a person familiar with the matter who declined to be identified because he wasn’t permitted to speak about the transaction.

Share Sale Discount

The offering price for the AIA shares represents a discount of as much as 7 percent on the Hong Kong-based insurer’s closing price of HK$29.20 on March 2. The sale is expected to be priced no later than tomorrow, according to the statement. Deutsche Bank AG and Goldman Sachs Group Inc. are taking orders for the sale, according to a termsheet obtained by Bloomberg.

AIG held 3.96 billion shares, or a 33 percent stake, in AIA as of May 31, according to the latter’s interim report last year. The U.S. company has agreed not to sell its remaining shares in the Asian insurer for another 180 days, according to the sales document today.

The Treasury, which is looking to divest its AIG stake over time, cut its holdings in May, selling 200 million shares for $29 each. The government must receive an average of at least $28.72 a share to recoup its investment.

AIG shares have surged 28 percent this year to $29.80 through March 2, as the insurer reported fourth-quarter profit of $19.8 billion tied to a tax benefit. The stock closed above the government’s break-even price on Feb. 28 for the first time since July.

Quarterly Swings

The AIA stake has contributed to swings in AIG’s quarterly earnings, since the holding is marked to market every three months. The shares added about $1 billion to fourth-quarter earnings, while fueling about half the company’s $4.11 billion third-quarter loss.

The AIA share sale gives AIG “progress toward paying off the government a little more fully as well as reducing the volatility of their core earnings,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP, in a phone interview today. He has a “hold” rating on the stock.

Bailed Ou

AIG was rescued in 2008 as bets on the mortgage market soured. The bailout was revised at least four times as the U.S. extended more credit and lowered the interest charged.

The survival of AIG, once the world’s biggest insurer, fell into doubt when Standard & Poor’s and Moody’s Investors Service cut its credit ratings in September 2008. The reductions threatened to force AIG to post more than $13 billion in collateral when the company was already short on cash. AIG couldn’t raise money by selling shares after the stock plunged.

Lehman, the biggest underwriter of mortgage-backed securities, filed the biggest bankruptcy in history on Sept. 15, 2008, with more than $613 billion of debt.

Pan Asia

AIG Chief Executive Officer Robert Benmosche halted the pace of asset sales when he took over in 2009, saying the company needed time to find the best prices. He said as recently as last month that the insurer may wait to sell its AIA stake and use the proceeds to reduce the government’s 77 percent ownership of AIG stock.

“We can think about using the proceeds if we decide to sell AIA potentially for capital management,” Benmosche, 67, said at a Feb. 15 investor conference in New York. “Capital management means we can buy some of the overhang from the U.S. Treasury.”

AIA, the third-largest Asia-based insurer by market value, operates in 15 markets including Hong Kong, China, Malaysia, Thailand and Singapore.

CEO Mark Tucker, 54, has overseen a 10 percent increase in AIA’s embedded value in the year to November to $27 billion. The estimate of the economic value of life insurance business using actuarial and investment assumptions is used to value life insurers.

AIG sold a Taiwan unit Nan Shan Life Insurance Co. for $2.16 billion last year. In 2010, it sold American Life Insurance Co. to MetLife Inc. for about $16 billion.