AIG Sways to Loss on High Charges - Analyst Blog

American International Group Inc. (AIG) reported third quarter operating loss of $200 million or $1.47 per share, dramatically behind the Zacks Consensus Estimate of $1.35 per share and operating income of $1.62 billion or $2.42 per share in the year-ago period.

On a GAAP basis, AIG reported a net loss of $2.4 billion or $17.62 per share, compared with a net income of $455 billion or 68 cents per share in the year-ago quarter. This included significant loss from discontinued operations, derivative hedging loss and net realized capital losses, marginally offset by gain from divested businesses. These restructuring-related charges totaled $4.5 billion in the reported quarter.

Discontinued operations loss before income taxes totaled $2.5 billion, including the loss from the pending sale of American General Finance Inc. (AGF) and the AIG Star and AIG Edison goodwill impairment charge discussed above, compared to income before taxes of $312 million in the comparable 2009 period. AIG's ALICO, AGF, AIG Star and AIG Edison are reported as discontinued operations post the sale of these units.

Although results appeared sluggish due to AIG's ongoing business restructuring process, stability continues to persist in insurance operations that drove the book value per share during the quarter.

AIG's continuing insurance operations reported an adjusted operating income (before net realized capital gains) of $2.1 billion, significantly ahead of $1.9 billion reported in the year-ago quarter.

AIG's General Insurance (Chartis) business significantly earned pre-tax income of $865 million compared with $682 million in the year-ago quarter. Besides, it is notable that both premiums written and premiums earned increased 6.5% and 8.3%, respectively, to $8.6 billion year over year. Consequently, combined ratio was 99.3% compared with 105.2% in the prior-year period.

Pre-tax income at Domestic Life & Retirement Services operations also increased to $998 million, compared with a loss of $222 million in the year-ago quarter. Assets under management (AUM) grew to $244.6 billion as of September 30, 2010, up 7% year over year, due to positive equity market returns and rally in the bond markets. However, premiums and other considerations were down 0.7% year over year at $1.27 billion.

Foreign Life Insurance & Retirement Services operations − comprising American International Assurance Co. Ltd (AIA) and American International Reinsurance Co. Ltd (AIRCO) − reported pre-tax income of $691 million, up 30.1% from $531 million. The ascent resulted primarily from increased premiums and higher in-force business in AIA and favourable currency.

Financial Services recorded operating − conducted through International Lease Finance Corp. (ILFC) and AIG Financial Products Corp (AIGFP) − pre-tax loss of $89 million from an income of $1.2 billion in the year-ago quarter. Operating earnings from capital markets were offset by losses incurred due to aircraft leasing.

In Other Operations, the United Guaranty Corporation (UGC) reported a pre-tax income of $124 million, compared with a loss of $461 million in the year-ago period. The growth reflects lower levels of newly reported delinquencies, higher mortgage cure rates and international delinquent loans. Besides, the asset management operating loss shrunk to $27 million from a loss of $233 million in the year-ago period, primarily due to reduced impairment losses.

However, interest expense on the Federal Reserve Bank of New York (FRBNY) Facility remained flat year over year at $1.3 billion. The fair value on AIG's interest in Maiden Lane III increased by $301 million compared to an increase of $1.2 billion in the prior-year period.

Financial Update

As of September 30, 2010, AIG reported a $10.6 billion increase in total equity from year-end 2009 to $108.7 billion. Pro forma book value per common share on AIG shareholders' equity increased 10.3% year over year to $48.24 for the nine months ended September 30, 2010.                                         

Government Loan Update

AIG has already moved ahead with its recapitalization plan, according to which the company has accorded to convert the various ownership interests of the U.S. government to common stock, which will ultimately be sold to public investors. This is expected to close early next year and will pay off debt owed to the FRBNY and leave the U.S. Treasury with a stake in the company of just above 92%. This appears to be an essential step to be taken for the stabilization of AIG.

As of September 30, 2010, AIG had outstanding net borrowings under the FRBNY Credit Facility of $14.3 billion, and accrued interest and fees of $6.2 billion, while $14.9 billion remained available.

As of September 30, 2010, the remaining available amount with the Treasury Department related to Series F Preferred Stock was $22.3 billion.

Business Update

On October 29, AIG completed an initial public offering of 8.08 billion shares of AIA for aggregate gross proceeds of approximately $20.51 billion. Upon completion of the initial public offering (IPO), AIG owned approximately 33% of AIA's outstanding shares. 

On November 1, AIG also closed the sale of its ALICO unit to MetLife Inc. (MET) for approximately $16.2 billion.

On August 10, the company entered into a definitive agreement to sell 80% of AGF for $125 million to Fortress Investment Group LLC (FIG). The deal is expected to close by the end of 2010.

On September 29, AIG also agreed to sell Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) for $4.8 billion, whereby the deal is scheduled for the first half of 2011.

Besides, AIG is also looking forward to divest its Nan Shan insurance unit in Taiwan by the end of 2011. Alongside, management is also eyeing an IPO for ILFC apart from other growth alternatives to improve and stabilize this unit.

 
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