AIG Profit Falls 85% to $269 Million on Japan, New Zealand Disaster Claims

American International Group Inc. (AIG), the insurer bailed out by the U.S. government, said first-quarter profit slumped 85 percent on costs tied to repaying its rescue and claims from the earthquakes in Japan and New Zealand.

Net income dropped to $269 million from $1.78 billion a year earlier, the New York-based insurer said yesterday in a regulatory filing. Shareholders’ equity, a measure of assets minus liabilities, fell 0.3 percent to $85 billion from $85.3 billion on Dec. 31.

Chief Executive Officer Robert Benmosche, 66, is relying on AIG’s property-casualty unit to deliver a greater portion of profit after the insurer struck deals to divest more than $50 billion in assets since its 2008 bailout. As part of its plan to repay taxpayers, AIG sold the non-U.S. life insurance businesses that previously had cushioned losses from natural disasters such as earthquakes and hurricanes.

“This is not the old AIG,” said Cliff Gallant, an analyst at KBW Inc., before the announcement. “It’s much more of a property-casualty company, and when you have these types of events, particularly with their large international market, you’re going to have quarters like this.” He rates the shares “underperform.”

Results included a pretax charge of $3.3 billion tied to repaying a Federal Reserve credit line. The U.S. Treasury Department converted its preferred stake into 92 percent of the company’s common stock in January. The Treasury plans to sell its holding in public offerings.

AIG booked a $1.9 billion gain tied to the sale of two Japan life units and income of $905 million tied to divestitures of American Life Insurance Co. and AIA Group Ltd.

Stock Slump

The insurer fell 36 percent this year on the New York Stock Exchange, the biggest drop in the Standard & Poor’s 500 Index. AIG dropped 50 cents to $30.29 at 7:39 p.m. in extended trading yesterday.

Catastrophe costs at the Chartis property-casualty unit rose to $1.73 billion from $501 million a year earlier, led by $1.3 billion in losses from the March 11 earthquake and tsunami in Japan. A temblor in New Zealand added $207 million of costs. The insurer also had costs from U.S. winter storms and flooding in Australia.

Chartis accounted for 49 percent of AIG’s revenue last year, compared with 46 percent in 2009. The share is poised to expand, as about one-fifth of last year’s revenue came from businesses that AIG has struck deals to divest.

The operating loss for Chartis, which sells coverage of commercial property, corporate boards and airplanes, was $463 million, compared with a profit of $879 million a year earlier. The company spent $1.19 per every premium dollar on claims and expenses, compared with $1.03 a year earlier.

‘Challenging Year’

Sales at Chartis rose to $9.17 billion from $7.64 billion a year earlier based on increases from an investment in Japan. The rest of 2011 will be a “challenging year” for Chartis, AIG said in a statement. The company expects “a weak growth environment in most developed economies.”

Policy sales will climb an average of about 6 percent a year from 2010 through 2015 if AIG meets the “long-term aspirational goals” outlined in the filing as it seeks to replace government funds with private capital. The company also seeks a return of equity of at least 10 percent in 2015 compared with a “normalized” return of 6.2 percent last year.

Benmosche had assigned Peter Hancock to lead Chartis, replacing Kristian Moor who was denied his full bonus because of what the company called “underachievement of certain financial metrics” in a March regulatory filing. Hancock, who had overseen risk and investments for Benmosche, agreed last month to pay Warren Buffett’s Berkshire Hathaway Inc. $1.65 billion to assume most of AIG’s asbestos liabilities.

Life Insurance

Hancock is seeking to assure investors “that those asbestos problems are not an issue for them,” said Gallant.

The U.S. life insurance and retirement services division’s adjusted pretax operating profit rose to $1.14 billion from $1.12 billion a year earlier.

AIG completed the sale of two Japan-based life insurance subsidiaries to Prudential Financial Inc. in February for $4.8 billion, including debt. About $2 billion of the proceeds were used to bolster reserves at Chartis, after AIG determined the unit needed to put aside $4.2 billion to help cover claims on policies sold in prior years.

While AIG was profitable in the quarter, the per-share result was a loss of 35 cents reflecting costs deemed to be dividends to preferred shareholders under generally accepted accounting principles.

Investment income rose 7.1 percent from a year earlier to $5.57 billion as alternative assets, including private-equity and hedge-fund holdings, generated $665 million compared with $377 million a year earlier.

LBO, Hedge Funds

Buyout funds earned $445 million and hedge funds gained $220 million. AIG had $19.4 billion in so-called partnership assets as of March 31, compared with $18.8 billion on Dec. 31.

AIG said it is working to boost returns by $500 million to $700 million before tax by investing the cash pile of about $14 billion that Benmosche previously intended to use to buy back mortgage bonds turned over in its bailout, according to yesterday’s regulatory filing. The company expects to get an average yield of 4 percent to 5 percent on the new investments.

The Federal Reserve Bank of New York rebuffed AIG’s $15.7 billion bid to buy back the mortgage securities, part of a pool called Maiden Lane II, and began auctioning them in blocks.

Bond Returns

The New York Fed’s decision was “disappointing,” Benmosche said in the statement. “We have quickly reallocated to other investments some of the funds we put aside to purchase Maiden Lane II assets.”

Unrealized gains on bonds available for sale rose to $8.73 billion from $7.63 billion three months earlier, led by improvements in mortgage- and asset-backed securities. The figures, reflecting market fluctuations that aren’t counted toward earnings, are monitored by investors and rating firms as a gauge of financial strength. Gains on AIG’s municipal bond holdings narrowed to $1.16 billion from $1.32 billion at the end of last year.

“Because of the budget deficits that most states and many municipalities are continuing to incur in the current economic environment, the risks associated with this portfolio have increased,” AIG said in a February regulatory filing.

AIG’s plane-leasing business, International Lease Finance Corp., posted a $117 million profit, compared with a $56 million loss in the year-earlier period as impairment losses narrowed. AIG’s mortgage insurer, United Guaranty Corp., reported operating income of $13 million, down from $73 million a year earlier.

European Swaps

The insurer’s maximum risk on a book of swaps sold to European banks narrowed to $35.1 billion as of March 31, compared with $38.1 billion as of Dec. 31. AIG’s rescue spared European banks from raising as much as $16 billion in capital in late 2008, the Congressional Oversight Panel said in June.

AIG benefited from a gain in the value of mortgage-linked assets turned over to Fed investment vehicles as part of the bailout. AIG valued its share in the funds at $8.6 billion as of March 31, compared with $7.6 billion at the end of the fourth quarter. AIG was rescued in 2008 in a bailout that swelled to $182.3 billion.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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