American International Group Inc. and its U.S. government overseers have agreed in principle on a plan that would speed up repayment of the giant insurer's taxpayer debt and pave the way for the U.S. to exit its ownership of the rescued company.

As part of the plan, the U.S. Treasury Department would convert $49.1 billion of preferred shares it holds in AIG into common shares and increase the government's ownership stake in the company to 92.1% from 79.8%. The conversion, which could take place by early 2011 if AIG can meet certain conditions by then, would position the government to sell off its stake in AIG over time through a series of share sales in the open market.

Before the conversion of the Treasury's shares can occur, AIG will have to repay a $20 billion secured credit facility from the Federal Reserve Bank of New York in full. AIG said it plans to use proceeds from major asset sales and the upcoming initial public offering of its pan-Asian life insurance unit to pay down its taxpayer debt and terminate the credit facility well before it is scheduled to expire in 2013.

AIG's publicly traded shares closed Wednesday at $37.45. At that level, the 92.1% stake the Treasury is expected to hold in AIG implies a stock market value for the company of well over $60 billion, which would make it one of the largest publicly traded financial institutions in the U.S. after the conversion. The Treasury would receive 1.655 billion common shares in AIG.

In busy premarket trading Thursday, AIG shares were up 11.6% to $41.81.

About $5 billion of AIG shares are currently held by private investors, who would be given up to 75 million warrants that would give them an additional opportunity to benefit from gains in the stock alongside the government. The strike price is $45 a share. The government could profit on its investment if its AIG shares can be sold above $30 apiece, a person familiar with the matter said.

In a recorded message on AIG's website Thursday morning, AIG Chief Executive Robert Benmosche said he is confident AIG would repay taxpayers at a profit.

The Treasury also plans to take over the majority of the New York Fed's interests in two special-purpose vehicles that are positioned to recoup $26 billion from the sales of AIG's overseas assets.

In a statement Thursday, Benmosche said the agreement "vastly simplifies current government support for AIG" and the plan will enable AIG to "concentrate our full attention on managing our businesses for the benefit of all our stakeholders."

The exit plan marks a milestone for both AIG and government officials. The company, a fraction of its former self after it nearly collapsed in September 2008, is trying to regain independence and access private-sector financing, which it hasn't tapped in two years. The government, which has provided over $120 billion in taxpayer support to AIG, is eager to get the controversial and costly crisis-era rescue behind it.

Treasury Secretary Timothy Geithner said in a statement that the AIG exit strategy "dramatically accelerates the timeline for AIG's repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company."

"While there is a lot of work ahead to execute the terms of this agreement," he added, "today we are much closer to seeing a clear path out."

Still, analysts noted, the exit plan is just a beginning; it could take years for the government to completely dispose of its shares in AIG, and much will depend on the insurer's business performance and market conditions. Some federal officials are hoping the sales would take as little as 18 months to complete, according to another person familiar with the matter.

On Thursday morning AIG also announced it has reached a deal to sell two Japanese life insurance units to Prudential Financial Inc. for $4.8 billion, of which $4.2 billion is cash AIG will use to repay the government. AIG is also preparing for a Hong Kong initial public offering at the end of October of its pan-Asian business, known as AIA Group Ltd., aimed at raising as much as $15 billion.

Separately, AIG is set by year-end to close a $15.5 billion deal to sell its second-biggest overseas-based life-insurance unit, American Life Insurance Co., or Alico, to MetLife Inc. Alico has a large presence in Japan and Europe.

AIG's board of directors and federal officials met until late in the evening Wednesday, and in some cases into the early hours of Thursday, to finalize the terms of the widely anticipated government exit strategy.

The plan required approval from the Treasury, the Federal Reserve, AIG's board, and three trustees that oversee the government's majority interest in AIG. A statement from the trustees Thursday said they voted unanimously in support of the AIG recapitalization plan.

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