American International Group, Inc. (AIG) reported its first quarterly profit since the third quarter of 2007, reflecting stabilization in some of its businesses and positive valuation changes. AIG, which received $180 billion of federal bailouts, said it also achieved several important milestones in its restructuring program. For the second quarter ended June 30, 2009, AIG reported net income of $1.8 billion, compared to a net loss of $5.4 billion orin the second quarter of 2008. Second quarter 2009 adjusted netincome was $2.0 billion, compared to an adjusted net loss of $1.3 billion in the second quarter of 2008. "While our insurance companies' operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events earlier in the year, performance trends stabilized from the first quarter," said CEO Edward Liddy. Liddy, who is stepping down next week as CEO to be replaced by former MetLife executive Robert Benmosche, said AIG expects there will be "continued volatility in reported results in the coming quarters, due in part to accounting charges related to ongoing restructuring activities." GENERAL INSURANCE General Insurance results in the second quarter 2009 included operating income before net realized capital gains of $1.0 billion, compared to $1.7 billion in the second quarter of 2008. AIG said the second quarter's results reflect a decline in underwriting profit as thecombined ratio increased 6 points to 98.2. However, for the first six months of 2009, the current accident year combined ratio was 95.0. Net investment income in the second quarter declined $81 million from the comparable prior year period due to lower yields and lowerpartnership income. The Commercial Insurance combined ratio was 99.8 in the second quarter 2009, an increase of 5.9 from the comparable prior year period. The loss ratio for accident year 2009 recorded in the second quarter was 3.2 points higher than the loss ratio for the accident year2008 recorded in the second quarter of 2008, reflecting the rate environment and increased loss trends in the quarter. The Foreign General Insurance combined ratio was 95.5 in the second quarter 2009, an increase of 6.1 from the comparable prior year period. The increase is primarily attributable to the expense ratio, which increased 4.9 points due to an increase in separation costs, restructuring charges, bad debt expenses, and decreased earned premium. AIG said that underwriting results in Europe and Far East regions held up well with strong underwriting profits in the current quarter. General Insurance net premiums written were $7.9 billion in the second quarter 2009, a 19.2 percent decline compared to last year's second quarter. Commercial Insurance reported net premiums written in the second quarter 2009 of $5.0 billion, a decrease of 18.2 percent compared to the second quarter 2008. AIG said the change was primarily driven by the "economy's continued effect on construction, real estate and transportation-related business, the unit's strategic decision to maintain price discipline across its business lines, including inworkers' compensation, as well as returned premiums related to loss sensitive business." These items represented approximately half of the decline in premiums, while the remainder of the decrease stemmed from the overall effect of the weak economy, its underwriting discipline, and the effect of AIG's challenges on the business across the entire portfolio, the insurer maintained.
Foreign General Insurance reported $3.0 billion in net premiums written in the second quarter 2009, a decline of 20.7 percent compared to the second quarter 2008. The effect of foreign exchange and the sale in 2008 of its Brazilian operations contributed 14 percent of the decline in premiums. Its General Insurance companies "continue to retain the vast majority" of their customers, the company said. It said business retention was down moderately in the second quarter 2009 compared to the prior year period. Despite what it termed "challenging economic conditions," second quarter 2009 new business writings exceeded $1 billion. In General Insurance, underwriting discipline resulted in continued rate improvement in the second quarter 2009 as the Commercial Insurance unit's rate change was approximately 2.0 percent positive. At June 30, 2009, General Insurance net loss and loss adjustment reserves totaled $60.0 billion, an increase of $604 million from March 31, 2009. At June 30, 2009, overall net loss and loss adjustment reserves including non-core insurance businesses totaled $65.8 billion, a decrease of $6.7 billion from March 31, 2009. The decrease is primarily attributable to the deconsolidation of Transatlantic in the second quarter of 2009. AIG provided a summary of recent activity. Dispositions:
- AIG Credit Corp. and A.I. Credit Consumer Discount Co. sold a majority of their U.S. life insurance premium finance business for approximately $680 million, closed on July 28, 2009.
- 21st Century Insurance Group sold for aggregate proceeds of approximately $1.9 billion, closed on July 1, 2009.
- Transatlantic Holdings, Inc. public offering of 29.9 million common shares owned by AIG for aggregate proceeds of $1.1 billion, closed on June 10, 2009.
- Prime real estate holding in the Otemachi District in Tokyo sold for approximately $1.2 billion, closed on May 28, 2009. The Otemachi transaction did not qualify as a sale under generally accepted accounting principles due to AIG's continued involvement as a lessee. As a result, the sale is accounted for as a financing arrangement with a $1.0 billion gain deferred until the expiration of AIG's leases in early 2011.
Status of Government Support:
- At June 30, 2009, AIG's total balance outstanding from the Federal Reserve Bank of New York credit facility was $44.8 billion, including $40 billion of net borrowings and $4.8 billion of accrued compounding interest and fees.
- As of June 30, 2009, AIG had drawn down $1.2 billion from the $29.8 billion available under Series F Preferred Stock Treasury commitment to help fund a total of $2.2 billion in capital contributions in 2009 to the Domestic Life Insurance & Retirement Services operations, which enabled them to maintain solid Risk-Based Capital ratios.
- As of June 30, 2009, AIG had outstanding $41.6 billion of Series E Preferred Stock pursuant to an agreement with the U.S. Department of Treasury under the Troubled Asset Relief Program (TARP).
Status of Unwinding AIG Financial Products Corp:
- Since December 31, 2008, the notional amount on AIGFP's derivative portfolio has been reduced by 17 percent from approximately $1.6 trillion at December 31, 2008, to approximately $1.3 trillion at June 30, 2009. During the second quarter of 2009, the derivative portfolio was reduced 13 percent from approximately $1.5 trillion at March 31, 2009.
- AIGFP reduced the number of trade positions in its portfolio by 36 percent from approximately 35,000 at December 31, 2008, to approximately 22,500 at June 30, 2009. During the second quarter, the number of trade positions was reduced 20 percent from approximately 28,000 at March 31, 2009.