(Source: Business Wire)
American International Group, Inc. (AIG) today reported its first quarterly profit since the third quarter of 2007, as certain of its businesses stabilized and the company's results reflected positive valuation changes. AIG also achieved several important milestones in its restructuring program.
For the second quarter ended June 30, 2009, AIG reported net income attributable to AIG of $1.8 billion, including net income attributable to AIG common shareholders of $311 million or $2.30 per diluted common share, compared with a net loss of $5.4 billion or $41.13 per diluted share in the second quarter of 2008. Second quarter 2009 adjusted net income was $2.0 billion, compared with an adjusted net loss of $1.3 billion in the second quarter of 2008.
SECOND QUARTER (in millions, except per share data) Per Diluted Share (a)(b) 2009 2008 2009 2008 Net income (loss) attributable to AIG $ 1,822 $ (5,357 ) $ 2.30 $ (41.13 ) Net realized capital gains (losses), net of tax (859 ) (4,019 ) (1.28 ) (30.85 ) FAS 133 gains (losses), excluding net realized capital gains (losses), net of tax (c) 676 (17 ) 1.01 (0.13 ) Adjusted net income (loss) attributable to AIG $ 2,005 $ (1,321 ) $ 2.57 $ (10.15 ) (a) Share and per share amounts prior to the second quarter of 2009 have been restated to reflect the 1-for-20 reverse stock split effective June 30, 2009. (b) As a result of the losses reported in the second quarter of 2008, basic shares outstanding were used for the period. (c) Represents the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. -------------------------------------------------------------------------------
Exception caught in main.
Commenting on the second quarter results, AIG Chairman and Chief Executive Officer Edward M. Liddy said, "Our results reflect stabilization in certain of our businesses. The primary drivers of our positive second quarter results were reductions in net realized capital losses, primarily due to the decline in other than temporary impairments resulting from the adoption of new accounting guidance and improved market conditions; positive valuation changes for our Maiden Lane interests on a net basis; continued reductions in the risk profile of the AIG Financial Products Corp. portfolio; a reduction in the allowance for recoverability of deferred tax assets, reflecting the effect of recently announced transactions; and gains on hedges not accounted for under FAS 133.
"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. We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to accounting charges related to ongoing restructuring activities. In particular, we expect that permanent reductions in the Federal Reserve Bank of New York credit facility related to the issuance of the preferred interests in the ALICO and AIA special purpose vehicles, which upon closing will substantially reduce our debt to the FRBNY, will result in accelerated amortization of a portion of the prepaid commitment asset approximating $5 billion before tax," Mr. Liddy said.
SIX MONTHS (in millions, except per share data) Per Diluted Share (a)(b) 2009 2008 2009 2008 Net loss attributable to AIG $ (2,531 ) $ (13,162 ) $ (28.29 ) $ (102.24 ) Net realized capital gains (losses), net of tax (3,490 ) (7,982 ) (25.80 ) (62.01 ) FAS 133 gains (losses), excluding net realized capital gains (losses), net of tax (c) 558 (298 ) 4.12 (2.31 ) Adjusted net income (loss) $ 401 $ (4,882 ) $ (6.61 ) $ (37.92 ) (a) Share and per share amounts prior to the second quarter of 2009 have been restated to reflect the 1-for-20 reverse stock split effective June 30, 2009. (b) As a result of the losses reported in each of the periods, basic shares outstanding were used. (c) Represents the effect of hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. -------------------------------------------------------------------------------
The following table summarizes the significant items included in the second quarter adjusted net income (loss):
(in millions, after tax) Three Months Ended June 30, Significant items, affecting adjusted net income (loss) 2009 2008 FRBNY credit line interest and amortization $ (894 ) - Market disruption-related: AIGFP credit valuation adjustment $ (13 ) $ (337 ) AIGFP operating results, including unrealized market valuation gains (losses) (73 ) (3,722 ) Net gains related to Maiden Lane retained interests 576 - Total market disruption-related activities $ 490 $ (4,059 ) Discrete period tax items $ 760 $ (12 ) -------------------------------------------------------------------------------
TOTAL EQUITY
At June 30, 2009, total equity was $62.1 billion, an $8.9 billion increase from $53.2 billion at March 31, 2009. The increase includes $1.8 billion of net income attributable to AIG, $5.7 billion of unrealized appreciation of investments, $1.2 billion from the drawdown of the Treasury Commitment related to the Series F Fixed Rate Non-Cumulative Preferred Stock, and $2.5 billion related to the implementation of FSP FAS 115-2, partially offset by a $3.3 billion reduction in non-controlling interests.
RESTRUCTURING UPDATE
Since September 2008, AIG has been working to execute an orderly asset disposition plan, protect and enhance the value of its key businesses, and position these franchises for the future as more independently run, transparent companies.
Mr. Liddy stated, "We continue to make significant progress in our efforts to restructure the organization, stabilize its capital structure, and maintain our liquidity position. We remain focused on the overriding goal of putting AIG in the best possible position to meet our obligations to stakeholders, including U.S. taxpayers, by protecting and enhancing the value of our businesses and positioning our key franchises for the future. The time frame and path for achieving this goal will continue to be highly dependent on market conditions."
Maximizing the Value of the Individual Businesses:
On June 25, 2009, AIG announced that it had entered into purchase agreements with the FRBNY that will accomplish two key goals: reducing the debt AIG owes the FRBNY by $25 billion; and positioning two of the company's leading international life insurance franchises, American International Assurance Company, Limited (AIA), and American Life Insurance Company (ALICO), for distinct branding and future separation. Under the agreements, AIG will contribute the equity of AIA and ALICO to separate special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs. The FRBNY will receive preferred interests in the AIA SPV of approximately $16 billion and in the ALICO SPV of approximately $9 billion. The face value of the preferred interests represents a percentage of the estimated fair value of AIA and ALICO. The amount outstanding on the FRBNY credit facility will be reduced by approximately $25 billion when the preferred interests are transferred and will result in a pre-tax charge of approximately $5 billion related to the accelerated amortization of the prepaid commitment fee.
On July 27, 2009, AIG announced that it has formed an SPV into which it intends to contribute the equity of Chartis, formerly known as AIU Holdings. The SPV will consist of the Commercial Insurance (including Private Client Group) and Foreign General Insurance businesses. The SPV formation, establishment of a global management team, the sale of its interests in Transatlantic Holdings and the Personal Auto Group, and the launch of a new brand are all important milestones in AIG's efforts to enhance the value of its industry-leading property casualty and general insurance businesses for the benefit of all stakeholders.
These transactions are subject to regulatory approval.
Sales of businesses and assets:
AIG has made significant progress on its disposition plan. During the first six months of 2009 and through July 31, 2009, AIG completed dispositions/asset sales that will generate a total of $2.6 billion in net after-tax proceeds available to be used to repay the FRBNY upon closing. AIG continues to engage in productive discussions with potential buyers for a number of its other businesses.
Dispositions:
AIG Credit Corp. and A.I. Credit Consumer Discount Company 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 FRBNY 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.
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. The second quarter's results reflect a decline in underwriting profit as the combined 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 lower partnership 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 year 2008 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. 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. 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 in workers' 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, our underwriting discipline, and the effect of AIG's challenges on the business across the entire portfolio.
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.
General Insurance continues to retain the vast majority of its customers. Business retention was down moderately in the second quarter 2009 compared to the prior year period. Despite 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 $604million from March 31, 2009. The foreign exchange effect for the second quarter of 2009 was an increase in reserves of $972 million. For the second quarter of 2009, net adverse loss development from prior accident years, excluding accretion of discount, was approximately $60 million.
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.
LIFE INSURANCE & RETIREMENT SERVICES
Life Insurance & Retirement Services second quarter 2009 operating income before net realized capital gains was $1.5 billion, reflecting a difficult, but improving, operating environment. The second quarter results were affected by lower assets under management in the investment-oriented product and annuity businesses both in the U.S.
