Monday, November 9, 2009

AIG showing some signs of improvement

life insurance

NEW YORK—American International Group Inc. last week reported a double-digit drop in revenues at its core insurance units, as the parent company announced its second consecutive quarterly profit.

Despite signs of improvement in AIG's overall financial position, the drop in insurance revenues could weaken the firm's franchise as it attempts to separate and ultimately spin off the insurance units, analysts say.

AIG reported a third-quarter profit of $455 million compared with a loss of $24.47 billion in the same period in 2008. For the first nine months of this year, AIG reported a $2.08 billion loss, a major improvement from the $37.6 billion loss it reported for the same period last year.

The overall improvements were due largely to narrowing investment losses and lower catastrophe losses, the company said.

“Our results reflect continued stabilization in performance and market trends,” Chief Executive Officer Robert Benmosche said in a statement.

For AIG's general insurance operations, rebranded as Chartis Inc. in July, net premiums written for the first nine months of this year totaled $23.73 billion, a 16% decline from the year-earlier period. Net premiums written for the quarter dropped 12% to $8.1 billion. The insurance units had a nine-month combined ratio of 99.95% this year compared with 96% last year.

The parent company continues to make progress in recovering from its disastrous investments in mortgage-backed securities, which pushed AIG to the brink of bankruptcy last year.

According to the AIG statement, the unit at the center of its problems, AIG Financial Products Corp., reduced the notional amount of its derivative portfolio by 28%, from $1.6 trillion at year-end 2008 to $1.1 trillion as of Sept. 30. The number of trade positions in its portfolio fell 43% during the same period.
Concern over insurance arm

Despite the overall improvement, analysts expressed concern.

“The concern is that the underlying insurance franchise appears to be weakening,” said Cathy Seifert, an equity analyst with New York-based Standard & Poor's Corp. “Considering that Chartis is being held up as a crown jewel, the results are disappointing.”

In addition, she said the declines may suggest a further drop in the insurer's competitive position. “The flight to quality that's under way is hurting them,” Ms. Seifert said.

Some observers said pricing remains a key concern.

AIG “says they are remaining disciplined, but it's possible they are not getting adequate pricing for the risks they are undertaking,” said Bill Bergman, an analyst with Morningstar Inc. in Chicago.

AIG, which has been working for the past year to sell assets and streamline operations in an effort to repay what it has drawn from its $180 billion government loan facility, said it expects to reduce its $122.31 billion in outstanding assistance by $25 billion by year-end, when the government takes a preferred stake in American International Assurance Co. and American Life Insurance Co., two of its biggest non-U.S. life insurance units.

Observers say the overall health and long-term strength of AIG's balance sheet depends on how well the insurer executes its asset disposition strategy.

“Right now, we expect the sales to be sufficient to meet the loan obligations,” said Kevin Ahern, a credit analyst at S&P in New York.

Mr. Benmosche warned that earnings will remain choppy as AIG executes its restructuring plan, which includes a planned $5 billion charge in the fourth quarter related to spinning off its two life insurance businesses.

“We continue to focus on stabilizing and strengthening our business, but expect continued volatility in reported results in the coming quarter,” Mr. Benmosche said in the statement.

Observers also say the success of Chartis' rebranding efforts will be critical in moving the insurer forward. When AIG announced that its property/casualty business, formerly AIU Holdings, had been rebranded as Chartis, it said the goal was to “advance the organization to its goal of operating independence.”

Last week, AIG said it had begun to legally change the name of its entities, and expects to have roughly 25 to 30 units legally renamed by year-end.

“It will be important to further distance themselves from the AIG name. Clearly it is just too damaged,” said Mr. Bergman.