American International Group Inc said on Thursday that Chief Executive Edward Liddy plans to step down, signaling the end to a short and tumultuous tenure running the government-rescued insurer.

Liddy, 63, named chairman and chief executive of AIG within hours of the government bailout last September via a massive capital injection, had always planned for his stay at the company to be temporary.

The former Allstate executive's reign at AIG may end up being best remembered for the multiple public scoldings he received from lawmakers over bonuses paid to executives of the insurer's troubled financial product unit.

Liddy said that while being a personal target of public anger had not been easy, he knew the assignment would be a tough one when he accepted it.

I absolutely would do it again. I think I've done the job well, he told Reuters. I think we are in a much better position than we were, and I'm comfortable turning the reins over to the next person.

Liddy, who was being paid an annual salary of $1, will not receive a severance package. One reason I did this for $1 a year was because it was not a permanent position, he added.

He expects his successor to be paid a much higher salary than he has taken. Even so, some say the job will be a tough one to fill.

It all depends on how much you enjoy testifying in front of angry public officials, said Donald Light, an analyst with Celent in San Francisco.

It would easily be one of the most challenging jobs in the world of insurance, but add in the public scrutiny and it becomes difficult by a different order of magnitude, Light added.

The U.S. government rescued AIG after money-losing bets on derivatives threatened to drive the company into bankruptcy.

AIG, which now owes taxpayers more than $85 billion, could take several more years to repay its obligations, Liddy said.

In total, taxpayers have put up to $180 billion at AIG's disposal, including billions of dollars to buy toxic assets that led to the company's losses and $30 billion in a credit facility that is as yet untapped.

In a separate proxy filing on Thursday, AIG proposed a reverse 1-for-20 stock split, which would effectively increase the value of individual shares. It will also seek shareholder approval to increase the number of authorized shares, enabling it to issue equity to raise capital, engage in debt for equity swaps, and other purposes. It also asked to give seniority to preferred shares held by the U.S. Treasury.

AIG shares, which have traded between 33 cents and $38.50 in the last 12 months, fell 6 percent in extended trading to $1.69 after Liddy's departure was announced, down from the $1.80 close in regular trading.

AIG also disclosed paying out more than $400,000 in costs related to travel, tax, legal and other payments for Liddy in 2008.

SPLITTING THE JOB

Liddy has recommended to AIG's board that they find a separate chairman for the company, splitting the two roles.

He said AIG's next chairman should be knowledgeable in the ways of Washington, while the next CEO should have a time horizon of at least three to five years.

Liddy does not expect the recruitment process to take more than a few months.

In the eight months since Liddy took over at AIG he has overseen asset sales of about $5 billion, much less than initially hoped as frozen credit markets scared off buyers.

More recently, he has laid a course for several larger divisions to potentially be spun off through initial public offerings early in 2010.

Along the way, Liddy recruited others to help him with the task of reshaping what was once the world's largest insurer, including Chief Restructuring Officer Paula Rosput Reynolds, a former CEO of auto insurer Safeco.

Liddy said on Thursday it was premature to discuss any other moves within the company, but said the candidate to succeed him as CEO could come from inside.

The individuals leading the search for AIG's new leadership will be announced next week, Liddy added, helped by a new slate of directors, and with the input of three trustees who were named earlier this year to oversee the government's nearly 80 percent stake in the company.

Before year end, Liddy expects to be back at home in Chicago, rejoining his wife, and closer to his three grown children and expanding brood of grandchildren.

My wife in her very gentle but probing way has from time to time said 'Where was this in our retirement plan?, said Liddy.

(Reporting by Lilla Zuill; Editing by Toni Reinhold, Andre Grenon, Tim Dobbyn)

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