American International Group (AIG) has “remained relatively stable” thanks in great measure to the more than $180 billion in taxpayer assistance the giant insurer has received since March 2008, according to a new government report on the Troubled Asset Relief Program.
The federal assistance also appears to be facilitating a more orderly restructuring of the company, according to the Government Accountability Office (GAO).
The Federal Reserve and Treasury have made more than $182 billion available to assist AIG since March 2008. As of Dec. 31, 2009, the outstanding balance of the assistance provided to AIG was $129.1 billion, about $8.4 billion more than the balance on Sept. 2, 2009.
GAO reported that, in general, the improvements in AIG’s condition in the second quarter of 2009 continued into the third and fourth quarters due largely to ongoing federal assistance.
The financial products unit, AIGFP, has continued to unwind its credit default swap positions. AIGFP also has shown progress in unwinding its Super Senior credit default swap portfolio but has made less progress in reducing the remaining multi-sector collateralized debt obligations (securities backed by a pool of bonds, loans, or other assets) portfolio.
AIG’s insurance operations are showing signs of recovery.
For the first time since the second quarter of 2008, additions to AIG life and retirement policyholder contract deposits have exceeded withdrawals.
AIG’s property/casualty companies also have shown improvements, according to GAO.
AIG is continuing to repay its debt to the federal government, but much of the progress reflects the numerous exchanges of debt that AIG owed the Federal Reserve Bank of New York Revolving Credit Facility (facility) with various issues of preferred equity. As a result of this shift from debt to equity, the authorized amount of the facility has decreased and the amount of preferred equity interests held in AIG and various special purpose vehicles for the government has increased.
The report notes that the government’s exposure to AIG is increasingly tied to the future health of AIG, its restructuring efforts, and its ongoing performance, especially by the property/casualty units that it plans to retain.
“[T]he sustainability of any positive trends in AIG’s operations depends on how well it manages its business in this current economic environment,” the report said.
AIG’s insurers have maintained capital above regulatory minimums. The property/casualty companies and domestic life companies had adjusted capital of at least 400 percent and 600 percent, respectively, of risk-based capital at year-end 2007, 2008, and 2009. However, the domestic life companies were only able to maintain their capital ratios with federal assistance. In contrast, AIG’s domestic property/casualty companies have maintained levels of adjusted capital in excess of requirements with virtually no direct federal assistance.
For the property/casualty commercial companies, dollar volumes of premiums written trended downward throughout 2007 and 2008, but beginning with the first quarter in 2009, they appeared to be stabilizing, despite a continuing soft market.
AIG’s combined ratios in both commercial and foreign general property/casualty insurance businesses rose above 100 percent in the third quarter of 2009 for the first time since the fourth quarter of 2008 and continued to rise in the fourth quarter of 2009, indicating that claims and administrative costs were higher and rising faster than premium earned and thus their insurance underwriting was not profitable in these two most recent quarters.
However, AIG’s property/casualty insurance segment was profitable in the third quarter of 2009 despite a combined ratio above 100 percent because positive investment returns more than offset underwriting losses.
The data cover only a 3-year period, but they suggest a pattern of loss and expense ratios rising in the latter part of calendar years 2007, 2008, and 2009 for both commercial and foreign general insurance. For commercial insurance the combined ratio spiked in the fourth quarter of 2008, largely due to an administrative charge to recognize permanent impairment of goodwill of previously acquired businesses. The higher combined ratio was also partly due to a higher loss ratio because of increased claims costs associated with Hurricane Ike and other major catastrophes in 2008. The combined ratio also rose in the fourth quarter of 2009, and this was largely due to increased claims costs related to a reserve strengthening charge.
Ratios for foreign general insurance also were higher in the first three quarters of 2009 than in the comparable quarters of 2008 and 2007. AIG officials said the foreign general loss ratio increased during 2009 primarily because of higher claims generally related to Directors and Officers insurance as well as professional liability insurance (Errors and Omissions coverage) for financial institutions at the time of the worldwide credit crisis, particularly in Europe. They also said that the foreign general expense ratio increased because AIG sold its Brazil operations, which resulted in decreased net premiums earned in 2008, more competitive pricing in the insurance markets in 2009, and higher levels of general operating expenses primarily related to remediation/audit of general insurance (Chartis, Inc.), pension costs, and post retirement liability.