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AIG Reduces Fed Debt, Paid $3.5B in Last Three Months

Posted on 05 Aug 2010

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Indicating an improvement in liquidity, American International Group Inc. (AIG) reduced the debt it owes on a Federal Reserve credit line by about $3.5 billion in the last three months.

AIG owed $23.4 billion as of July 28, down from about $27 billion at the end of April, according to Fed data. The draw has declined for 10 of the past 12 weeks, the first time that has happened since the facility was established in 2008 as part of New York-based AIG’s first rescue.

“The fact that this number is coming down is a positive indication that the solvency of the insurance entities is on the mend,” said David Havens, managing director at Nomura Securities International Inc. in New York. “Assuming the funds repaying the Fed line are coming from the insurers, that’s a strong signal that their balance sheets have been repaired.”

Chief Executive Officer Robert Benmosche must increase insurance profits and divest assets to repay AIG’s $182.3 billion rescue. The firm was saved in September 2008 after housing-market losses and was forced to use bailout funds to bolster capital at property-casualty and life-insurance units.

One AIG unit that has reported partial results for the second quarter, American Life Insurance Co., has posted a profit gain. Net income tripled in the six months ended May 31 to $694 million from $208 million in the year-earlier period, according to a filing this week from MetLife Inc., which is buying Alico to expand in nations including Japan and Poland.

“In order for the government to fully exit, there has to be a company that is generating earnings,” said Julie Burke, a managing director at Fitch Ratings in Chicago. She said the decline in Fed borrowing was a “good trend.”