4th UPDATE: AIG 3Q Profit Driven By Investment Gains
(Updates with more information on drawdown of government funds and ILFC
background.)
By Lavonne Kuykendall and Joan E. Solsman
Of DOW JONES NEWSWIRES
American International Group Inc.'s (AIG) third-quarter profit was driven by
higher investment income and gains in the market value of its invested assets,
while its core insurance operations struggled with a weak economy and lingering
negative perceptions in the marketplace.
But after two consecutive quarterly profits, the company Friday suggested that
turning a profit in the fourth quarter might be tough, with an expected $5
billion charge connected with its special-purpose vehicles and a $1.4 billion
after-tax loss from its sale of Nan Shan Life Insurance.
The scant signs of progress helped push AIG shares down 9.67% to close at $
35.48. The stock, which has risen nearly sixfold from an all-time low in March,
is up 13% year to date.
AIG is still leaning on the government for assistance. In the third quarter,
AIG drew down $2.1 billion from its U.S. Treasury Department commitment and
reported that interest and fees on its New York Federal Reserve facility totaled
$5.2 billion.
AIG disclosed in a filing it intends to draw down another $2.1 billion from
the Treasury, which it expects to receive Nov. 13. The combined $4.2 billion
drawdown is being used to purchase shares of International Lease Finance Corp.,
the aircraft leasing unit of AIG, in an intercompany purchase, and to
restructure United Guaranty Corp. AIG is also paying down ILFC debt with
government funds.
AIG shelved plans to sell ILFC to a consortium led by Onex Corp. (ONEXF),
though the Canadian private-equity group remains in talks to back a partial
buyout by the lessor's founder and chief executive, Steve Hazy, according to
people familiar with the situation.
A deal with Hazy for around $5 billion in ILFC assets isn't expected to be
concluded before year end, these people said.
Standard & Poor's Equity Research maintained its hold rating on the stock.
Analyst Catherine Seifert noted that the company's earnings beat "was largely
due to favorable credit spreads."
The mortgage, credit and stock markets have all improved significantly in the
year since AIG's government bailout.
AIG posted a profit of $455 million, or 68 cents a share, compared with a
year-earlier loss of $24.47 billion, or $181.02 a share. The latest results
included $1.8 billion in capital losses, while the previous year's results
included billions in write-downs from credit-default swaps and $15.06 billion in
capital losses.
Excluding capital losses and hedging activities that don't qualify for hedge-
accounting treatment, the profit was $2.85 in the latest quarter. A survey of
analysts by Thomson Reuters predicted $1.98.
AIG Financial Products reported an operating profit of $1.4 billion for the
quarter, up from an $8.2 billion operating loss last year. The unit has made
progress in unwinding its derivatives portfolio, though notional value still
stood at $1.1 trillion. It reported an unrealized market value gain of $959
million on its troubled credit default swap portfolio
"I think the most important takeaway is that the swap book did not blow up,"
CreditSights analyst Rob Haines said. "If that happens, then all this could be
moot."
AIG's general and life and retirement insurance businesses both were affected
by the weak economic environment and lingering negative perceptions of AIG.
General Insurance reported operating income of $722 million, up from $105
million in the quarter last year, driven mostly by investment income, as
premiums fell 13%.
Profit at the life-insurance division more than doubled to $2.2 billion as
assets under management rose in an improving market. Premiums, deposits and
other considerations dropped 38.6% from last year, to $13.7 billion.
The company expects to take a $5 billion charge in the fourth quarter as it
closes on the special-purpose vehicles connected to its foreign life-insurance
businesses AIA and ALICO, which will pay off $25 billion of its New York Fed
credit line.
The outstanding balance of AIG's government bailout, including government
support of all types, stood at $120.6 billion at the beginning of September, out
of total authorized assistance of $182 billion.
-By Lavonne Kuykendall and Joan E. Solsman, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com
(Doug Cameron in Chicago and Ben Dummet in Toronto contributed to this story.)
(END) Dow Jones Newswires
11-06-091823ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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