AIG’s Risk From Storms Rises After Life Divestitures

AIG’s Risk From Storms Rises After Life Divestitures (Update1)
March 29, 2010, 11:36 AM EDT
More From Businessweek
How to Repel Customers from Your Web Site
John W. Rodgers Jr.: My Favorite Indicator
Credit-Card Security: External Resources
Mark Zandi: My Favorite Indicator
French Nuclear Power Struggles in a Cold Snap
Story Tools
e-mail this story print this story digg this save to del.icio.us add to Business Exchange (Adds PineBridge sale in the 14th paragraph.)

By Hugh Son

March 29 (Bloomberg) -- American International Group Inc., the insurer that stayed profitable through the Sept. 11 attacks and Hurricane Katrina, may be more exposed to disasters after divesting life insurance units to repay its government bailout.

AIG will be a “smaller and more focused company” after selling American Life Insurance Co. and AIA Group Ltd., divisions that produced more than a third of the firm’s insurance revenue last year, Chief Executive Officer Robert Benmosche told shareholders this month. Catastrophe losses have the potential to drain AIG’s government bailout funds, the New York-based firm said in a February regulatory filing.

Former CEO Maurice “Hank” Greenberg built AIG into the world’s largest insurer by using earnings from life units, plane-leasing and consumer finance to balance volatile revenue and claims costs from property-casualty operations. AIG had to sell businesses to help repay the 2008 government rescue needed after losses tied to home loans.

“They definitely will be affected by storms in the future,” said Terry Leone, senior insurance analyst at SNL Financial in New York. “Their overall business will be more tied to the property-casualty cycle than it was in the past.”

AIG’s diversity allowed it to post profits after the worst terrorist attack and costliest natural disaster in U.S. history. The insurer recorded net income of $327 million in the third quarter of 2001 even as the strike on the World Trade Center cost the company $820 million. Warren Buffett’s Berkshire Hathaway Inc. had a net loss of $679 million that quarter.

Hurricane Katrina

AIG had $1.57 billion in catastrophe costs in the third quarter of 2005, when Katrina hit the U.S. Gulf Coast. Still, AIG had net income of about $1.7 billion that quarter. Allstate Corp., the Northbrook, Illinois-based home and auto insurer, lost $1.55 billion in the same span.

Forecasters at Colorado State University and AccuWeather Inc. have said the Atlantic hurricane season, which begins June 1, will result in more storms than average. Already this year, more than 20 insurers and reinsurers have reported losses of as much as $4.1 billion from the windstorm that struck Western Europe last month and the earthquake in Chile, the fifth- strongest in a century. AIG has yet to report the costs of those catastrophes.

Benmosche, AIG’s fourth CEO since Greenberg left in 2005, is selling businesses to repay loans within the firm’s $182.3 billion bailout. Ratings firm A.M. Best is evaluating if the sales of AIA and Alico will reduce AIG’s ability to service its debt, analyst Jennifer Marshall said in a March 3 research note.

Global Profits

AIG got about $22.8 billion in premiums and fees last year from selling life insurance and retirement products outside the U.S., where AIA and Alico operate. That compares with $5.3 billion from U.S. life units, which Benmosche has said AIG will keep, and $32.2 billion from global property casualty sales.

The life units were “a material provider of earnings to AIG historically,” Marshall said. The declining price of commercial coverage “will continue to challenge profitability at the company’s core property-casualty operating subsidiaries” as AIG competes for market share.

U.S. commercial insurance rates fell 5.6 percent in the fourth quarter, according to a survey by the Washington-based Council of Insurance Agents and Brokers. Prices have dropped industrywide in every quarter since 2004 and AIG has said it expects the decline to continue this year. Sales growth in 2010 will be driven by increases outside the U.S., the insurer said.

Prudential, MetLife

“The fact that property casualty and life insurance sales aren’t correlated was important for AIG,” said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for Aite Group, a research firm. “I’d be very surprised if AIG diversified out of life altogether.”

The insurer secured deals to sell the two insurers to Prudential Plc and MetLife Inc. for a combined $51 billion. The sales will be completed by year-end, the companies have said. Christina Pretto, an AIG spokeswoman, declined to comment.

AIG also completed the sale of its PineBridge Investments fund manager to Pacific Century Group today, the insurer said in a statement. Hong Kong billionaire Richard Li’s Pacific Century agreed in September to pay about $500 million for the subsidiary, which operates in about 30 countries and managed $87.3 billion as of year-end.

Property-Casualty Reserves

AIG set aside more reserves for casualty claims last year, a move that contributed to a $2.3 billion fourth-quarter charge. Fitch Ratings said last month that the charge to cover claims from policies sold in prior years caused concerns about the “reserve adequacy and underlying profitability” of AIG’s property-casualty operations.

The company also drew $2.2 billion in the first quarter from a U.S. Treasury Department facility to bolster property- casualty units. AIG used the cash to redeem securities held by insurance subsidiaries, improving liquidity and a measure of capital adequacy watched by rating firms and regulators.

AIG’s property-casualty operations, rebranded Chartis Inc. last year to distance the division from AIG, sell coverage for property, worker’s compensation, corporate boards and ships and airplanes. Chartis operates in more than 160 countries and jurisdictions, and gets more than 40 percent of sales from outside the U.S.

AIG needed a U.S. rescue in September 2008 after soured derivative bets tied to housing markets drained cash. The company’s government assistance includes a $60 billion Federal Reserve credit line, up to $52.5 billion to buy mortgage-backed securities owned or backed by the insurer, and a Treasury investment of as much as $69.8 billion.