Sense of Deception

AIG Posts Loss Tied to Rescue, Reserves; Shares Fall

By Hugh Son

Feb. 26 (Bloomberg) — American International Group Inc. posted a wider-than-expected loss after setting aside more reserves for insurance claims and paying down bailout debts. The shares fell 10 percent in New York trading.

The fourth-quarter net loss of $8.87 billion, or $65.51 a share, narrowed from $61.7 billion, or $458.99, a year earlier when AIG recorded the biggest loss in U.S. corporate history, the New York-based firm said today. Results included $6.7 billion in charges fueled by paying down AIG’s Federal Reserve credit line. It cost AIG $1.8 billion to add to property- casualty reserves as sales in the division slipped 2.2 percent.

“It was a messy quarter, and overall it shows you how deep a hole they’ve dug, and how hard it is for them to dig out,” said Bill Bergman, an analyst at Morningstar Inc. in Chicago. “The reserve boost is a little red flag, as the industry is seeing largely favorable trends in reserve development.”

Chief Executive Officer Robert Benmosche, 65, appointed in August, must increase insurance profits to repay loans in AIG’s $182.3 billion bailout. Benmosche, who has told staff that AIG was “too big,” is also divesting two of the company’s largest non-U.S. life insurance divisions to reduce the firm’s draw on a Federal Reserve credit line by $25 billion.

Shares Decline

The operating loss, which excludes some investment results, was $53.23 a share, missing the $3.94 average loss estimate of three analysts surveyed by Bloomberg.

The insurer declined $2.74 to $24.77 at 4:02 p.m. in New York Stock Exchange composite trading. AIG has slipped about 17 percent this year. The company plunged 97 percent in 2008, the year it almost collapsed, and 4.5 percent last year.

Shareholders’ equity, a measure of assets minus liabilities, fell 4 percent to $69.8 billion from $72.7 billion as of Sept. 30. Unrealized gains on bonds available for sale were $1.06 billion, compared with $143 million as of Sept. 30. Gross unrealized losses narrowed for residential mortgage-backed securities and widened for municipal bonds. The figures, monitored by investors and rating firms, reflect market fluctuations that aren’t counted toward earnings.

AIG’s annual loss narrowed to $10.9 billion for 2009 from $99.3 billion in 2008. The insurer earned $6.2 billion in 2007.

‘Not Out of the Woods’

“While we are not out of the woods by any stretch, these numbers represent a substantial improvement from just one year ago,” Benmosche said today in a recorded message on AIG’s Web site. “We believe we are on our way to regaining our stature as one of the world’s largest and most successful property-casualty insurance operations.”

Sales at property-casualty operations, which include coverage of commercial property, corporate boards and airplanes, fell 2.2 percent to about $6.9 billion as clients scaled back coverage amid the recession.

AIG said that it spent about $1.32 on claims and expenses for every dollar it collected in premiums, compared with $1.21 a year earlier, as the insurer added to reserves, in part to pay claims from workers’ compensation policies sold before 2003.

Fitch Ratings said today that it may downgrade AIG’s property-casualty businesses because the $1.8 billion charge raised “concerns about AIG’s reserve adequacy and underlying profitability, primarily on long-duration casualty business lines.” Workers’ claims sometimes surface years after a policy is sold as employees report back and neck injuries.

AIG may have been “aggressive” in pricing its workers’ compensation and professional liability policies, analyst Todd Bault, then of Sanford C. Bernstein, said in a research note in November estimating that the shortfall may be $11 billion.

Commercial Rates

U.S. commercial insurance rates fell 5.6 percent in the fourth quarter when compared with the same period a year earlier, according to a survey by the Washington-based Council of Insurance Agents and Brokers. Prices have declined in every quarter since 2004 and AIG said the drop may continue this year. Sales growth in 2010 will be “modest,” driven by increases outside the U.S., the insurer said.

Competitors including Chubb Corp. and Liberty Mutual Group Inc. have said that AIG, in an effort to keep customers, is slashing its prices to levels that may be inadequate to cover claims. Joel Ario, the Pennsylvania insurance regulator, said he expects to complete a “broad-scale examination” into AIG during the first half of this year, including whether the insurer is underpricing.

Life Insurance

Life insurance premiums and other considerations from the U.S. operation dropped 24 percent from a year earlier to $1.28 billion. Outside the U.S., the figure slipped 2.1 percent to $6.2 billion.

“It’s still a troubled company, but the only negative we weren’t already expecting was the reserve development, and that was on business put on the books years and years ago,” said Robert Haines, an analyst at CreditSights Inc. in New York. “Generally, there’s been stabilization in their major businesses.”

The insurer’s consumer lender, American General Finance Corp. posted an operating loss of $309 million in the quarter, compared with a $248 million loss a year earlier. The Evansville, Indiana-based lender has shut offices, cut jobs and sold receivables to ease liquidity pressure.

AIG’s plane-leasing business, International Lease Finance Corp., posted a $344 million operating profit, a gain of 66 percent from a year earlier after the unit expanded its fleet and borrowing costs fell.

ILFC, American General

ILFC and American General have been downgraded by rating firms and lost access to their usual funding sources. AIG said today it would extend support to the units through the end of February 2011, which is more than three months longer than the insurer’s previous commitment.

AIG’s Financial Products unit, the derivatives trading business that pushed its parent company to the brink of collapse in 2008 with bets on subprime mortgages, reported $80 million in fourth-quarter operating profit, compared with a $17.2 billion loss in the year-earlier period. The unit will be shuttered by yearend, AIG has said.

AIG’s maximum risk on a book of swaps sold to European banks narrowed to $150 billion as of Dec. 31, compared with $171.7 billion at the end of September. The insurer said in June that declines in the value of assets tied to the swaps could have a “material adverse effect” on results and that the risk of losses on the derivatives may last “longer than anticipated.”

Hedge Funds

AIG’s so-called partnership investments, which include private-equity and hedge-fund holdings, posted their second straight quarterly gain. Buyout funds gained $290 million in the fourth quarter, compared with a loss of $673 million in the year-earlier period. Hedge funds contributed $154 million after a loss of $1.02 billion.

Since its September 2008 rescue, AIG has struck deals to raise more than $12 billion by selling businesses including an asset manager, equipment guarantor and U.S. auto insurer. The company had 96,000 workers at year-end, a 17 percent decline from 2008, the company said today.

AIG gave stakes in the two life divisions, American Life Insurance Co. and American International Assurance Co., to the Fed in December. MetLife Inc. has said it is in talks to buy Alico, which operates in more than 50 countries outside the U.S. The insurers have discussed a price of about $15 billion, according to people with knowledge of the situation.

Asset Sales

As part of its fourth bailout in March 2009, AIG said it would cut its Fed debts by as much as $8.5 billion by securitizing U.S. life insurance assets. The company said today it won’t take that step because “the combination of strategic asset sales and reviving businesses will generate sufficient funds to repay the taxpayer,” said Mark Herr, an AIG spokesman, in an e-mailed statement.

AIG, once the world’s largest insurer by assets, needed a bailout after losses from the derivatives trading unit that guaranteed mortgage-linked assets sapped the parent company of cash. The rescue includes a $60 billion Federal Reserve credit line, a Treasury Department investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

The Federal Reserve Bank of New York said today that Peter Langerman, CEO of Franklin Resources Inc. subsidiary Mutual Series, will join the three-member panel of trustees overseeing the government’s stake of almost 80 percent in the insurer. Langerman replaces Douglas Foshee, the CEO of natural gas firm El Paso Corp.


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