More profit for AIG, but challenge too

American International Group Inc. posted its second profitable quarter in a row, but weak results at its main insurance businesses underscored the scale of the challenges the giant insurer still faces.

AIG's third-quarter net income of $455 million, or 68 cents a share, was driven largely by write-ups at its financial-products division and higher investment income. Both came amid a rally in U.S. financial markets in the three months through September.

Business volumes in the third quarter were down significantly from a year ago. But compared with the second quarter of 2009, some parts of AIG's property-and-casualty and life-insurance operations improved slightly, indicating they are stabilizing following customer defections and withdrawals earlier on.

AIG's derivatives trading unit swung to a profit. The unit has made progress in unwinding its portfolio.

Some businesses are still seeing strains. AIG said sales of investment-linked products by its foreign life-insurance operations were affected by negative perceptions around the company.

In a statement, Chief Executive Robert Benmosche said the results “reflect continued stabilization in performance and market trends.” He said AIG turned away some renewal business in the property-and-casualty sector because competitors were too aggressive in cutting prices—a criticism some insurers also have leveled against AIG since its bailout by the government.

In the third quarter, AIG wrote $1.1 billion in new general-insurance business, roughly the same amount as in the second quarter.

The general-insurance business, recently renamed Chartis, reported operating income of $722 million from $105 million last year, driven mostly by investment income as premiums fell 13%.

Profit at the life-insurance division more than doubled to $2.2 billion as assets under management rose in an improving market. Premiums, deposits and other considerations dropped 39% from last year, to $13.7 billion.

AIG's financial-products division reduced its massive book of derivatives 13% in the third quarter to a notional value of $1.1 trillion, helping to cut the number of its outstanding trades to around 20,000 from 35,000 at the end of 2008. It booked a $959 million unrealized market-value gain on its credit default swap positions, a source of its troubles last year.

AIG continues to lean heavily on the U.S. government for financial assistance. The company owes $44.6 billion under a Federal Reserve Bank of New York credit facility, including over $5 billion in accrued interest and fees. It has issued another $44.8 billion worth of senior preferred shares to Treasury, and said in a filing on Friday that it expects to draw an additional $2.1 billion from Treasury this month.

As of Oct. 28, AIG affiliates had $5.8 billion of short-term debt outstanding under the government's Commercial Paper Funding Facility. That debt is to due be repaid in January 2010, which could increase AIG's borrowings under the New York Fed credit facility, it said. AIG and its units also have about $23 billion in long-term debt maturing between Oct 1 this year and Sept 30, 2010.

After two consecutive quarterly profits, the company Friday suggested that turning a profit in the fourth quarter might be tough.

AIG anticipates booking a $5 billion charge when it transfers stakes in two Asian life insurers into special-purpose vehicles as part of the U.S. government-led restructuring plan. It also will record a $1.4 billion after-tax loss from its sale of a Taiwanese unit.

Shares of AIG fell $3.80, or 9.7%, to $35.48 on Friday but are still up 13% this year.

(Source: WSJ)

   Print Version     |        Back    |     Send To Friend