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AIG Announces $62 Billion Loss; Revamps Financing

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American International Group Inc. has reported a $62 billion net loss for the fourth quarter of 2008 and also has announced major changes in financing arrangements.

AIG, New York, says its operations were somewhat stronger than net results indicate.

Overall revenue from premiums and other considerations held steady at about $20 billion.

The general insurance operations reported a $2.8 billion loss from insurance and current investment operations, but the life and retirement operations reported a $742 million profit on current life, retirement and investment operations.

Overall fourth-quarter net results include $26 billion in losses resulting directly from economic turmoil, $25 billion in accounting charges related to taxes and intangible assets, $6.7 billion in restructuring expenses, and $6.9 billion in federal credit line interest and amortization.

In addition to announcing earnings, AIG discussed revisions in the package of aid it is getting from the federal government.

Officials at the U.S. Treasury Department and the Federal Reserve Board have announced the following changes in the financing arrangements the government has provided for AIG:

- AIG may use equity stakes in two overseas units — American International Assurance Company and American Life Insurance Company — to pay back up to $26 billion of amounts borrowed from the revolving credit facility provided by the Federal Reserve Bank of New York.

- The Treasury will provide about $30 billion through an equity capital facility.

- Treasury will exchange its existing $40 billion cumulative perpetual preferred shares for “new preferred shares with revised terms that more closely resemble common equity and will improve the quality of AIG’s equity and its financial leverage,” officials say.

- The Federal Reserve Bank of New York will eliminate the 3.5% floor on the rate for a revolving credit facility it has been providing since September. AIG has been paying an interest rate of 3 percentage points over the 3-month London Interbank Offered Rate, with a minimum rate of 3.5%. Now, AIG will still be paying a rate of 3 percentage points over LIBOR, but with no minimum rate.

- AIG could sell a 19.9% stake in its AIG Commercial Insurance unit within a year. Originally, AIG had planned to sell only life units. AIG also will be creating a general insurance holding company, AIU Holdings Inc., that will include its commercial insurance group, foreign general unit and other property-casualty operations. AIU Holdings will have a management team and brand that will be “distinct from AIG,” AIG says.

- The New York Fed could help AIG securitize $5 billion to $10 billion in life insurance cash flows.

AIG discussed the fourth-quarter results and financing changes during a conference call. An audio recording of the conference call will be available here.

AIG Chairman Edward Liddy says in a statement about the AIG’s earnings that the company is still viable.

“We have made meaningful progress in addressing liquidity issues related to [AIG Financial Products] and our securities lending activities, and have announced several divestitures,” Liddy says. But “the economy and capital markets remain in turmoil, and we are taking additional steps to preserve the value of our businesses and maximize the ultimate proceeds for the benefit of all stakeholders, including taxpayers.”

Cliff Gallant, an analyst at Keefe, Bruyette & Woods Inc., New York, says AIG’s earnings statement indicates deterioration in the company’s market penetration, both on the property-casualty and on the life side.

The deterioration creates an opportunity for “well-positioned competitors to gain momentum in gaining market share,” Gallant writes in a note on AIG’s results.

The p-c market deterioration is obvious, and there appears to be “significant pressure on premiums,” Gallant writes. “Whether the decline is due to clients leaving or because AIG must significantly cut prices to keep clients, the implication is clear that AIG’s franchise has suffered.”

U.S. life sales and deposits were down 50%, U.S. retirement premiums and deposits were down 24%, and foreign life premiums and deposits down 46%, Gallant writes.

The Details

Here are some highlights from AIG’s Form 10-K annual report:

- Life and retirement premiums, deposits and considerations — a figure that includes new sales — fell 38%, to $15 billion, but life and retirement premiums and considerations, a figure that mainly reflects revenue from in-force business, rose 3.5%, to $9 billion.

- Excluding realized capital gains losses, life and retirement revenue fell 49%, to $7.4 billion. Domestic life and retirement revenue fell 29%, to $3.1 billion.

- Life and retirement policyholder benefits and claims incurred fell 75%, to $2.5 billion.

- Home service fixed annuity sales increased 77%, to $76 million.

- Premiums, deposits and other considerations for domestic fixed annuities increased 1%, to $1.2 billion.

- Premiums, deposits and other considerations for domestic group retirement products fell 10%, to $1.6 billion.

- Premiums, deposits and other considerations for domestic variable annuities fell 75%, to $265 million.

- One reason the government has supported AIG is to help the company unwind its credit default swaps arrangements — transactions that AIG’s AIG Financial Products unit once used to speculate based on beliefs about whether other debt issuers would or would not default on their obligations. Maiden Lane III L.L.C., New York, the entity created to unwind the AIG Financial Products CDS arrangements, has succeeded at terminating many of the CDS arrangements by buying associated collateralized debt obligations with $62 billion in par value, AIG says. The notional value of AIG Financial Products’ “super senior multi-sector CDOs” still outstanding was down to about $12 billion in mid-February, AIG says.


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