AIG Reduces Q4 Loss; Reports Some Stabilization While Challenges Remain

American International Group, Inc. (AIG) reported a net loss of $8.9 billion for the fourth quarter of 2009, compared to a net loss of $61.7 billion in the fourth quarter of 2008.

The company said that net loss in the quarter can be attributed to loss reserve strengthening of $2.3 billion for its commercial insurance lines, $6.2 billion in charges related to asset divestments, a $2.7 billion tax allowance, and a $2.8 billion loss on the sale of a life insurance subsidiary.

During the quarter, AIG’s said certain of its businesses continued to stabilize and the results reflect continued improvement in the global financial markets.

AIG’s General Insurance unit, Chartis, reported a fourth quarter 2009 operating loss of $1.8 billion, due to loss reserve strengthening of $2.3 billion, compared to a $1.7 billion operating loss in the fourth quarter of 2008, which included a $1.2 billion goodwill impairment charge.

The reserve increase follows the completion of AIG’s annual year-end loss reserve study and represents 3.6 percent of Chartis’ total carried loss reserves of $63.2 billion at December 31, 2009. The reserve additions are primarily related to excess casualty, and excess workers compensation lines, particularly for accident years 2002 and prior.

At Dec. 31, 2009, Chartis U.S.’s statutory policyholder surplus was approximately $27 billion, an increase of approximately 4 percent from year-end 2008.

Chartis recorded net premiums written of $6.9 billion in the fourth quarter 2009, a 2.2 percent decrease from the fourth quarter of 2008. The decline is an improvement over prior quarters in 2009 and reflects increased business retention, new business submissions, and a more stable rate environment, according to the company. However, net premium writings continue to be affected by challenging economic conditions, the effect of foreign exchange, and Chartis’ decision to maintain price discipline in lines of business where rates are unsatisfactory, particularly in certain classes of workers’ compensation, the company’s statement said.

Commercial insurance net premiums were down primarily driven by adverse economic conditions on workers’ compensation, construction, real estate and transportation lines of business.

The fourth quarter 2009 combined ratio was 132.5, including 28.2 points from reserve strengthening, compared to 120.8 in the prior year period, which included 13.8 points related to the goodwill impairment. For the full year 2009, the current accident year combined ratio was 99.2, a 2.6 point improvement over the 2008 accident year combined ratio.

AIGFP

Financial product unit AIGFP, which is in the process of winding down its businesses and portfolios, reported operating income of $80 million in the fourth quarter of 2009, compared to a $17.2 billion operating loss in the fourth quarter of 2008 related primarily to the unrealized market valuation losses on its super senior credit default swap portfolio and credit valuation adjustments. The fourth quarter 2009 operating income included $275 million in unrealized market valuation gains on AIGFP’s super senior credit default swap portfolio, a favorable credit valuation adjustment of $345 million, partially offset by $529 million of interest charges on inter-company borrowings with AIG that are eliminated in consolidation.

Year In Review

“Our team made great progress during the year in executing our strategic restructuring plan, by stabilizing and strengthening AIG’s insurance businesses, reducing AIG Financial Products Corp. (AIGFP) exposures, and positioning certain businesses for sale,” AIG President and Chief Executive Officer Robert H. Benmosche said,

Benmosche said the company’s executives are “increasingly confident” about the mix of AIG’s businesses over the long term. “We are taking the right steps to regain our stature as one of the most respected and diverse property/casualty operations in the world, with a strong U.S. life and annuity operation and several other businesses that will enhance our nucleus, help us to meet our goal of repaying taxpayers and provide value to the communities where we operate,” Benmosche said.

AIG, which is 79 percent-owned by the government, is in the process of selling its American Life Insurance Co unit to MetLife Inc. and is planning an initial public offering of its Asian life insurance subsidiary, American International Assurance.

As of February 17, 2010, AIG had outstanding net borrowings under the FRBNY Credit Facility of $21 billion, plus accrued interest and fees of $5.5 billion. Available capacity totaled $14 billion. As of February 17, 2010, the remaining available amount under the Department of the Treasury commitment was $22.3 billion.

In its annual report filed with the Securities and Exchange Commission, AIG cited the continuing challenges and risks it faces and raised the possibility as it has done in the past of a need for additional government aid.

After considering all of the risks and uncertainties it faces, AIG management believes that it will have adequate liquidity to continue as a going concern for at least the next 12 months. However if its plans do not materialize as hoped or other risks and uncertainties arise, AIG said it might need additional U.S. government support to meet its obligations as they come due.

Tight scrutiny by regulators, including over compensation for key executives, has made it challenging for AIG to continue to engage in business in the ordinary course and AIG said it does not expect these conditions to change significantly in the foreseeable future.

AIG also continues to come up against tough competition. The firm said its businesses face “intense competition to retain existing customers and to maintain business with existing customers and counterparties at historical levels. Further, AIG has been and continues to be at a significant disadvantage in certain markets in soliciting new customers. Although surrender rates have begun to stabilize, AIG expects these difficult conditions to continue for the foreseeable future.”