| AIG Posts $455 Million Profit as Catastrophe Claims Decline |
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06/11/2009 17:41 (14 Day 12:30 minutes ago) | |||||
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The FINANCIAL -- American International Group, Inc. (AIG) on November 6 reported a profit in the third quarter of 2009, as certain of its businesses continue to stabilize and the company’s results reflected positive market valuation changes.
"For the third quarter ended September 30, 2009, AIG reported net income attributable to AIG of $455 million, including net income attributable to AIG common shareholders of $92 million, or $0.68 per diluted common share, compared with a net loss of $24.5 billion or $181.02 per diluted share in the third quarter of 2008. Third quarter 2009 adjusted net income was $1.9 billion, compared with an adjusted net loss of $9.2 billion in the third quarter of 2008," AIG reports.
Commenting on the third quarter results, AIG President and Chief Executive Officer Robert H. Benmosche said, “Our results reflect continued stabilization in performance and market trends. AIG employees are working to preserve the strength of our insurance businesses in a challenging market by working closely with our distribution partners, with third quarter 2009 showing signs of stabilization. Pricing in our commercial property casualty business has been stable. Management continues to monitor rates closely and maintain underwriting discipline, turning away some renewal business due to aggressive pricing by existing and new competitors. AIG also took several important steps in its restructuring program. At AIG FP, virtually all key risk measures are down significantly and the earnings again benefited from a positive unrealized market valuation gain on the Super Senior Credit Default Swap portfolio. Additionally, we announced the sales of Nan Shan and a portion of AIG ’s investment advisory and asset management business, as well as the combination of our Domestic Life Insurance & Retirement Services businesses and ongoing efforts to build their value as part of AIG .
“Improved market performance, together with application of the new investment impairment accounting standard adopted in the second quarter of 2009, drove a reduction in net realized capital losses compared to third quarter 2008 and positive valuation changes for our Maiden Lane Interests, as well as increases in partnership and mutual fund income. These gains were offset by impairments in the Asset Management segment, higher current accident year losses related to credit crisis exposures and prior accident year losses in General Insurance and lower income from Life Insurance & Retirement Services investment-linked and annuity products globally.
“We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities. When we close the special purpose vehicles with respect to AIA and ALICO with the Federal Reserve Bank of New York (FRBNY), we expect to recognize an approximate $5 billion charge for accelerated amortization of the prepaid commitment asset. These transactions are expected to close in the fourth quarter.”
TOTAL EQUITY
At September 30, 2009, total equity was $76.5 billion, a $14.4 billion increase from $62.1 billion at June 30, 2009. The increase includes $455 million of net income attributable to AIG , $12.1 billion of unrealized appreciation of investments, $2.1 billion from a draw-down of the Department of the Treasury Commitment related to the Series F Fixed Rate Non-Cumulative Preferred Stock, partially offset by a $350 million reduction in non-controlling interests.
PROGRESS ON MANAGEMENT’S PLANS FOR STABILIZATION OF AIG AND REPAYMENT OF AIG ’S OBLIGATIONS
Since September 2008, AIG has been working to execute an orderly asset disposition plan, protect and enhance the value of its key businesses, and position these franchises for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in its liquidity and capital, and expects to accomplish this over a longer time frame than originally contemplated.
Maximizing the Value of the Individual Businesses:
The AIA and ALICO special purpose vehicle (SPVs) transactions, announced in the second quarter of 2009, are expected to be consummated in the fourth quarter of 2009 resulting in a $25 billion reduction in the balance and amount available under the FRBNY Facility. This reduction is expected to result in a pre-tax charge of approximate $5 billion related to the accelerated amortization of the prepaid commitment fee.
AIG continues to make progress on its disposition plan. During the first nine months of 2009 and through October 31, 2009, AIG entered into agreements to sell or completed the sale of operations and assets that are expected to generate a total of approximately $5.6 billion in net after-tax proceeds that will be available to repay outstanding borrowings and reduce the amount of the FRBNY Facility upon closing. AIG continues to engage in productive discussions with potential buyers for a number of its other businesses.
Announced Dispositions:
On September 5, 2009, AIG entered into an agreement to sell a portion of its investment advisory and asset management business, for approximately $300 million in cash, plus additional future consideration that includes a performance note and a continuing share of carried interest.
At September 30, 2009, AIG ’s total balance outstanding from the FRBNY Facility was $41.0 billion, including $35.8 billion of net borrowings and $5.2 billion of accrued compounding interest and fees, with availability of $24.2 billion. Interest and fees accrued have been charged against AIG ’s earnings.
AIGFP reduced the notional amount of its derivative portfolio by 28 percent from approximately $1.6 trillion at December 31, 2008, to approximately $1.1 trillion at September 30, 2009. During the third quarter of 2009, the derivative portfolio was reduced 13 percent from approximately $1.3 trillion at June 30, 2009.
General Insurance, branded as Chartis in July 2009, reported operating income before net realized capital gains (losses) of $722 million in the third quarter of 2009, compared to $105 million in the third quarter of 2008, reflecting improvement of $612 million in net investment income, primarily due to positive partnership income. Third quarter 2009 underwriting losses were primarily driven by credit crisis related claims and continued adverse development of prior accident year loss reserves. Third quarter 2008 underwriting losses were primarily driven by catastrophe losses.
General Insurance recorded net premiums written of $8.1 billion in the third quarter of 2009, a 13 percent decline compared to last year’s third quarter. The decline was partially due to the effect of foreign exchange, the sale in 2008 of the unit’s Brazilian operations, and the strategic decision to remain price disciplined, particularly in workers’ compensation, as well as to the overall effect of the weakened economy. However, business retention was at its highest level since September of 2008, new business written exceeded $1.1 billion for the quarter, and pricing remained stable.
General Insurance combined ratio in the third quarter 2009 was 105.2 compared to 104.5 in the prior year period. The result reflects adverse loss development from prior accident years, whereas results in the comparable period in 2008 reflected favorable development from prior accident years. Additionally, a significant portion of the increase in the current accident year loss ratio is the result of the worldwide financial credit crisis and a competitive rate environment. For the first nine months of 2009, the current accident year combined ratio was 97.5.
Commercial Insurance combined ratio was 106.4 in the quarter, a decrease of 2.6 points from the comparable prior year period. This decrease was primarily driven by the significant reduction in catastrophe losses, partially offset by higher net adverse development from prior accident years. For the first nine months of 2009, the current accident year combined ratio was 98.0.
Foreign General Insurance combined ratio in the third quarter 2009 was 103.4, an increase of 6.2 points from the comparable prior period, primarily driven by an increase in charge offs and transition costs as well as losses related to the worldwide financial crisis. For the first nine months of 2009, the current accident year combined ratio was 96.5.
At September 30, 2009, General Insurance net loss and loss adjustment reserves totaled $60.4 billion, an increase of $407 million from June 30, 2009. The foreign exchange effect for the third quarter of 2009 was an increase in reserves of $247 million. For the third quarter of 2009, net adverse loss development from prior accident years, excluding accretion of discount, was approximately $246 million. At September 30, 2009, overall net loss and loss adjustment reserves including non-core insurance businesses totaled $64.9 billion, a decrease of $897 million from June 30, 2009.
LIFE INSURANCE & RETIREMENT SERVICES
Life Insurance & Retirement Services third quarter 2009 operating income before net realized capital gains (losses) was $2.2 billion compared to $1.0 billion in the third quarter of 2008, reflecting a difficult, but improving operating environment. Assets under management in the investment and retirement oriented products grew over the second quarter of 2009 helped by improved net flows and upward trends in equity markets. Net investment income increased over the third quarter of 2008 and second quarter of 2009 primarily from higher partnership and mutual fund returns as well as favorable valuation adjustments from the retained interest in Maiden Lane II, which offset the negative effects of higher liquidity and the de-risking of certain investment portfolios. Net realized capital losses were significantly lower than the third quarter of 2008 and continued to be lower than in the past several quarters due to improving market conditions and the adoption of new accounting pronouncements during the second quarter.
Premiums and other considerations were $7.9 billion in the third quarter of 2009, down 16.1 percent from the third quarter 2008 but relatively flat with the first two quarters of 2009, as businesses continue to stabilize. Premiums, deposits, and other considerations amounted to $13.7 billion, a decline of 38.6 percent compared to the third quarter of 2008. The decline was due principally to lower sales of investment-oriented life and retirement services products as sales efforts remained challenged due to the lingering effect of negative AIG events earlier in the year and an overall decline in industry sales of investment-oriented life and retirement services products.
In AIG ’s Foreign Life Insurance & Retirement Services operations, sales activity has continued to improve in most regions, although sales activity in foreign investment-oriented life and retirement products, especially in the U.K., Japan and Korea, remain negatively affected by AIG events. AIA and ALICO have continued to experience improving operating results following revitalization of their distribution networks and the stabilization of global economic activities. Revenues before realized capital gains rose significantly from the third quarter of 2008 and remained largely consistent with the past two quarters.
Domestic Life Insurance & Retirement Services third quarter 2009 operating income before net realized capital gains (losses) of $1.1 billion showed an improvement over the third quarter of 2008 and both the first and second quarters of 2009. Premiums, deposits, and other considerations were down 38 percent over the third quarter of 2008 as a result of ratings downgrades and the effects of negative AIG publicity during the past year. However, premiums deposits and other considerations were up 10 percent over the second quarter of 2009, principally due to improvements in fixed annuity and group retirement deposits. Investment results continued to improve and life insurance mortality remained at favorable levels during the third quarter of 2009. Domestic Retirement Services improved results are driven by the absence of unfavorable DAC unlocking adjustments in the current quarter, which totaled $728 million in the third quarter of 2008. At September 30, 2009, assets under management totaled $208.3 billion, up from $190.6 billion at December 31, 2008. Life insurance in force was $958.8 billion at September 30, 2009, compared to $1,025.8 billion at December 31, 2008. Domestic Retirement Services surrender activity has stabilized and deposits increased 17 percent over the second quarter of 2009, resulting in a significant improvement in net flows, although still negative.
FINANCIAL SERVICES
Financial Services reported third quarter 2009 operating income before net realized capital gains (losses) and the effect of hedging activities that did not qualify for hedge accounting treatment of $1.6 billion, compared to an $8.3 billion operating loss in the third quarter of 2008.
AIGFP, which is in the process of winding down its businesses and portfolios, reported operating income of $1.4 billion in the third quarter of 2009 compared to an $8.3 billion operating loss in the third quarter of 2008. The third quarter 2009 operating income included $959 million in unrealized market valuation gains on its super senior credit default swap portfolio, a favorable credit valuation adjustment of $730 million, partially offset by $569 million of interest charges on inter-company borrowings with AIG that are eliminated in consolidation.
International Lease Finance Corporation (ILFC) reported a 19.3 percent increase in operating income to $365 million, compared to income of $306 million in the third quarter of 2008, driven primarily by a larger aircraft fleet and lower composite borrowing rates compared to the third quarter of 2008.
American General Finance, Inc. (AGF) reported a third quarter 2009 operating loss of $154 million compared to an operating loss of $446 million in the third quarter of 2008, primarily due to lower operating expenses as the third quarter 2008 included a $341 million goodwill write down, a lower provision for loan losses compared to last year, partially offset by a decline in finance charge revenues from lower average net receivables.
ASSET MANAGEMENT
Asset Management reported a third quarter 2009 operating loss before net realized capital losses of $1.1 billion, compared to an operating loss of $28 million in the third quarter of 2008. The quarter’s results reflect an impairment of goodwill of $697 million as well as impairments on proprietary real estate investments offset by improved partnership income. The goodwill impairment in the quarter was the result of a revaluation of the fair value of the reporting unit in light of current market conditions and recently announced transactions. A total of $287 million of the total goodwill impairment of $697 million is offset in non-controlling interest, which is not reported as a component of the Asset Management segment results. Also negatively affecting the results for the quarter were net realized capital losses of $1.2 billion due to economic hedges in the spread-based investment business and impairments on proprietary private equity investments.
OTHER OPERATIONS
Parent Company results in the third quarter 2009 included an operating loss before net realized capital gains (losses) of $1.3 billion, compared to a $1.6 billion loss in the third quarter of 2008. This lower operating loss was primarily the result of lower unallocated corporate expenses partially offset by restructuring expenses. The increase in interest income on inter-company loans essentially offset the higher interest expense on the FRBNY Facility.
Non-core business results in the third quarter 2009 included operating income before net realized gains (losses) of $701 million, compared to a $1.0 billion operating loss in the third quarter of 2008. The current quarter’s results include a gain associated with the change in fair value of AIG ’s interest in Maiden Lane III, partially offset by an underwriting loss in Mortgage Guaranty.
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