AIG Posts Q2 Loss; Chartis Insurance Stable Despite Flood, Oil Spill Claims

August 6, 2010

American International Group Inc. reported a $2.7 billion quarterly loss compared to a net profit of $1.8 billion for the same quarter a year earlier. The second quarter 2010 loss was primarily due to a $3.3 billion non-cash goodwill impairment charge included in discontinued operations.

Second quarter 2010 adjusted net income was $1.3 billion compared to $1.1 billion in the second quarter of 2009.

[AIG also said it is in talks to end the government’s role in the company.]

Chartis

AIG’s general insurance operations, Chartis, saw second quarter 2010 operating income of $955 million compared to $1.0 billion in the second quarter of 2009. Chartis incurred approximately $287 million of catastrophe losses in the quarter, principally related to the floods in the southeastern United States, Hurricane Alex, U.S. hailstorms, the Deepwater Horizon oil rig explosion, and the Icelandic volcano.

Chartis has incurred a net property loss of $23 million related to the Deepwater Horizon explosion and subsequent oil spill in the Gulf of Mexico. Chartis said it continues to monitor the casualty exposure to Deepwater Horizon and believes that its carried loss reserves are adequate to cover estimated losses attributable to this event. However, it said its claims estimates may change over time, as the forensic investigation is incomplete, the cleanup is incomplete, and the litigation has only just begun.

Excluding catastrophe losses, Chartis’ operating results increased 22 percent from the second quarter of last year, primarily driven by an improvement in partnership income.

The second quarter of 2010 combined ratio was 102.0 compared to 98.2 in the prior year period. The current period combined ratio, excluding catastrophe losses, was 98.3, compared to 98.2 in the prior year.

Chartis’ expense ratio increased by 2.0 points from the prior year period, to 29.9, driven by a decline in earned premiums, long term incentive compensation costs, higher acquisition expenses related to a change in mix of business, and higher general expenses from implementation of new financial and operational systems.

Worldwide net premiums written of $7.8 billion declined 1.6 percent compared to the same period last year. The company said the decline is due to “Chartis’ risk management initiatives and continued price discipline in lines where market rates are unsatisfactory,” partially offset by a positive impact from foreign exchange and strategic growth in higher margin lines of business.

Chartis is actively reducing its aggregate exposure in certain property and casualty lines of business. While Chartis continues to see improved premium and account retention, new business submissions, and a relatively stable rate environment, its net premium writings continue to be adversely affected by a weak economic environment.

Domestic Life Insurance

Domestic Life Insurance & Retirement Services, now branded SunAmerica Financial Group, reported second quarter 2010 operating income of $1.1 billion compared to operating income of $254 million in the second quarter of 2009. The significant improvement reflected an increase in net investment income from partnerships and a $226 million increase in the fair value of the retained interest in Maiden Lane II, as well as lower deferred acquisition costs and sales inducement amortization due to higher net realized capital losses.

Foreign Life Insurance

With the classification of ALICO and Nan Shan as discontinued operations, AIG’s remaining Foreign Life Insurance & Retirement Services operations are conducted through AIG Star Life Insurance Co. Ltd (AIG Star), AIG Edison Life Insurance Co. (AIG Edison), AIA and American International Reinsurance Co., Ltd. (AIRCO).

In the Japan operating segment, AIG Star and AIG Edison reported second quarter 2010 operating income of $216 million compared with $239 million in the second quarter of 2009. These results reflect a reduction in partnership and mutual fund income, as well as a reduction in policies in-force due to high lapses in 2009.

Annualized new premiums grew 29 percent to $170 million. Life insurance sales increased as production in the face-to-face channels is recovering after the financial crisis. Medical sales growth was supported by the launch of new products early in 2010. Annuity sales increased due to a high rate of recapture of maturing annuities driven by a strong Yen exchange rate and by gradually improving sales from banks that had previously suspended sales of AIG Star and AIG Edison products.

AIG recently announced plans to conduct an initial public offering of AIA, by seeking a listing of AIA on the Hong Kong Stock Exchange, subject to regulatory approvals and market conditions.

Financial Services

Financial Services reported pre-tax income of $42 million for the second quarter of 2010 compared to a pre-tax loss of $103 million during the second quarter of 2009, with operating earnings at International Lease Finance Corp. (ILFC) offset by losses at AIG Financial Products Corp. (AIGFP).

AIGFP, which continues the process of winding down its businesses and portfolios, reported a $132 million operating loss in the second quarter of 2010, essentially flat compared to the second quarter of 2009.

ILFC reported pre-tax operating income of $182 million for the second quarter of 2010 compared to operating income of $335 million in the second quarter of 2009. On July 6, 2010, ILFC signed an agreement to sell six aircraft to a third party.

CEO Benmosche

“AIG’s continuing insurance operating results remain solid, while the company continues to execute on its restructuring plans and prepares for separation from the U.S. government. Our overall strategy remains unchanged. We remain focused on monetizing AIA and ALICO as quickly as possible in order to repay taxpayers, at values reflecting the unique strengths of these highly attractive franchises,” said AIG President and Chief Executive Officer Robert H. Benmosche.

Benmosche said the sale of ALICO is proceeding as planned and is expected to close in the fourth quarter.

“Importantly, operating earnings at our continuing insurance operations have remained solid and stable, with $2.2 billion of pre-tax operating earnings generated by Chartis, SunAmerica Financial Group, AIG Star and AIG Edison. Our teams continue to work extremely hard to strengthen their franchises through extensive distribution, client, and employee outreach, in the midst of very competitive market conditions,” he said.

He said the recent decision to take AIA public, subject to regulatory approval is expected to advance the company’s ability to reduce its obligations to the Federal Reserve Bank of New York (FRBNY) and take significant steps toward a sustainable capital structure.

Status of Government Support

As of June 30, 2010, AIG had outstanding net borrowings under the FRBNY Credit Facility of $20.5 billion, plus accrued interest and fees of $6.0 billion. Net borrowings under the FRBNY Credit Facility decreased by $1.2 billion from June 30, 2010 to July 28, 2010.

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

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