Chartis 4Q Loss Tied to Reserve Strengthening

February 25, 2011

American International Group Inc. reported net income of $11.2 billion for the quarter ended Dec. 31, 2010, and $7.8 billion for the full year 2010.

Included in the 2010 fourth quarter results is a previously announced $4.2 billion net charge to strengthen Chartis loss reserves and gains of $17.6 billion from the sale of divested businesses, primarily from the proceeds of the AIA Group Limited (AIA) initial public offering and a gain of $4.1 billion from the sale of American Life Insurance Co. (ALICO)s.

AIG’s after-tax operating loss was $2.2 billion for the quarter and $898 million for the full year.

AIG’s property/casualty insurer Chartis reported a fourth quarter operating loss of $4.0 billion, due to the reserve additions of $4.2 billion, compared to a loss of $1.8 billion in the fourth quarter of 2009. Excluding reserve strengthening, fourth quarter 2010 operating income for Chartis was relatively flat year over year.

Partially offsetting the reserve action was a $346 million improvement in net investment income for Chartis driven by higher partnership returns.

The fourth quarter reserve development drove most of the underwriting losses for the quarter and the year at Chartis. Approximately 80 percent of the total reserve charges were for four long-tail lines of business: asbestos, excess casualty, excess workers’ compensation, and primary workers’ compensation.

In the quarter, AIG had about $200 milion in catastrophe losses, including some from the Australia floods, and another almost $100 million in large losses.

For Chartis, fourth quarter 2010 worldwide net premiums written of $7.6 billion increased 9.4 percent compared to the same period last year. Excluding Fuji, worldwide net premiums written declined 3.3 percent. The company attributed this to challenging economic conditions that are affecting ratable exposures and a competitive property/casualty market.

The fourth quarter 2010 combined ratio was 160.5, including 49.2 points from reserve strengthening, compared to 132.5 in the fourth quarter of 2009. Excluding the reserve development and catastrophes, the fourth quarter combined ratio for Chartis was 108.9, compared to 105.5 for the same quarter last year.

The full year 2010 current accident year combined ratio, excluding reserve development and catastrophe losses, was 100.3, compared to 99.3 in the prior year period.

The Chartis expense ratio was 35.1 for the quarter and 31.1 for the year.

AIG said that Chartis continues to hold “more statutory surplus than any commercial property/casualty insurance competitor in the U.S. market.”

In its annual report, AIG said it projects weak growth for Chartis in 2011 given continued heavy competition in property/casualty markets and a slow global economy.

AIG, which was rescued by the federal government in 2008 with a $182 billion bailout, has been divesting some of its international insurance units including Alico and AIA to remain in business and repay the government.

Robert H. Benmosche, AIG president and chief executive officer, said the giant insurer is on track to repay taxpayers and is focused on building long-term value.

“We completed several key restructuring milestones in the quarter and we remain focused on long-term growth and building value at our ongoing insurance operations and other businesses,” said Benmosche. “In 2010, we said we would realign AIG to grow our businesses and to ultimately repay the U.S. taxpayer. We remain extremely grateful to the taxpayers and have made significant progress since January 2010 towards independence from this support.”

During a conference call, Benmosche was asked to compare AIG’s commercial insurance operation today to its size as “the 800 pound gorilla” before AIG’s near-collapse and bailout. “We’re about 780 pounds today,” he said.

He said the company has “come through a horrible period of time” but that client retention has been very good and the company that used to have unlimited capital has learned how to operate with limited capital. Over the past several years, Chartis has sought to reduce writings in the more capital-intensive classes of its commercial business while increasing writings in higher-margin, less volatile segments such as its specialty commercial and consumer businesses. The company said it remains price-disciplined where market rates are unsatisfactory.

AIG expects the government’s stake in its business to be ended by mid-2012.

On Jan. 14, 2011, AIG completed its recapitalization, which included repaying the FRBNY Credit Facility in full utilizing a portion of the proceeds from asset sales, partially repaying the government’s ownership interests in special purpose vehicles that hold interests in AIA and ALICO, and exchanging preferred stock held by the U.S. Department of the Treasury and the AIG Credit Facility Trust for AIG common stock.

On Nov. 1, 2010, AIG completed the sale of ALICO to MetLife for $16.2 billion.

On Oct. 29, 2010, AIG sold, in an initial public offering, 8.08 billion ordinary shares (or 67 percent) of AIA for approximately $20.5 billion.

On Sept. 30, 2010, AIG announced its agreement to sell its Japan-based life insurance subsidiaries, AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co., to Prudential Financial Inc., for $4.8 billion, consisting of $4.2 billion in cash and $0.6 billion in the assumption of third-party debt. AIG completed the sale on Feb. 1, 2011.

Topics USA Profit Loss Property Casualty Casualty AIG

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