AIG: $51 billion down, $51 billion to go

NEW YORK (CNNMoney.com) -- After selling off its second "crown jewel" insurance business in a week, AIG has made a sizeable dent in its plan to repay its debt to taxpayers.

But the troubled insurer is still just halfway home and it's not clear exactly how AIG will pay off the remainder.

On Monday, the insurer announced that it would sell foreign life insurance business Alico to MetLife (MET, Fortune 500) for $15.5 billion. Last week, AIG said it reached an agreement to sell Asian life insurance giant AIA for $35.5 billion.

That's $51 billion that AIG said will eventually be used to pay down its debt to the government. The two sales mark the most significant progress that AIG has made to-date in its efforts to repay its bailout, which is worth up to $182 billion.

Taxpayers won't get their money back overnight. The sales still need to be completed, and AIG has said that more than $19 billion will come over time from proceeds generated by sales of securities.

So far, the government has given AIG $136.5 billion, of which the insurer owes $102 billion. But AIG's debt total will be cut in half after the insurer turns over the $51 billion it secured from the Alico and AIA sales.

First, AIG will send $25 billion to the Federal Reserve Bank of New York to buy back the Fed's stakes in Alico and AIA. In December, the New York Fed reduced AIG's debt by a total of $25 billion in exchange for taking stakes in Alico and AIA worth the same amount.

AIG (AIG, Fortune 500) will then pay off its original Fed loans from the company's first bailout in September 2008. Currently, AIG has borrowed just over $25 billion from that loan commitment, though that total has been creeping up month to month and could be higher by the time AIG is ready to pay it down.

After the $51 billion from its recent sales goes toward paying down AIG's debt, the insurer will still have at least $51 billion in bailout debt left.

That includes $5.5 billion in interest and fees on its loans from the revolving credit facility and $46.8 billion from the Treasury's investment in AIG through the Troubled Asset Relief Program.

AIG's problem is that it is running out of assets that it can sell off to pay back its loans.

The company has been working hard to sell off its smaller, non-core assets, but since 2009, AIG has collected just $5.6 billion from those sales. Since AIG rescinded an earlier plan to sell off Chartis, its core property and casualty business, there don't appear to be any other "crown jewel" companies like AIA and Alico that AIG seems wiling to part with.

Two units that AIG is likely willing to put up for sale are struggling mightily: Struggling plane-leasing unit ILFC, as well as consumer-finance arm American General Financial Services. Both are hemorrhaging money and so far, AIG has been unable to find bidders. Experts say it is unclear how much the company would be able to get for them anyway.

"AIG is left with real dilemma: What can you sell?" said Stewart Johnson, portfolio manager at Philo Smith & Co. "Meanwhile, AIG's No. 1 goal must be to be self-sufficient, having more cash coming in than going out."

AIG has said it will be able to repay its debt in part from revenue, but the company is still losing money. Last quarter, AIG said it lost $9 billion. Though its insurance companies appear to be stabilizing, AIG added $2.7 billion to its loss reserves from insurance claims last quarter -- not necessarily a sign of confidence in its insurance businesses..

Still, the company is confident in its ability to pay back the government through asset sales and profit. That confidence was made clear late last month, when AIG said it no longer plans to use cash flows from life insurance policies to help pay down its debt. AIG had previously planned to sell life insurance securities to the Fed to reduce its debt by $8.5 million.

If it is unable to repay its debt through asset sales and revenue, a last-ditch effort may be to convert the government's private equity stake in the company into common stock, and sell that over time. That is the strategy that the government employed with Citigroup (C, Fortune 500) and General Motors.

The problem with owning a whole bunch of AIG's common stock is it's a big gamble for taxpayers to take. A common stock investment would be worth much less than what the government initially put into AIG, and it would rely heavily on market factors to get most of its money back.

"That may be the way AIG does reliquify, but the government will probably end up losing a bit on it," said David Merkel, chief economist at Finacorp Securities. "Anyone playing on the common [stock] can't do it with great degree of certainty that they'll get anything back. It's like a lottery ticket."