AIG Posts $1.86 Billion Profit on Investments, AIA Gain

American International Group Inc. (AIG), the insurer that counts the U.S. as its largest shareholder, posted a fourth straight profit as gains in the value of its AIA Group Ltd. (1299) stake fueled investment results.

Third-quarter net income was $1.86 billion, or $1.13 a share, compared with a loss of $3.99 billion, or $2.10, a year earlier, when investments declined. Operating profit, which excludes some investing results, was $1 a share, beating the average estimate of 87 cents in a Bloomberg survey of 20 analysts.

Chief Executive Officer Robert Benmosche is seeking to improve results at the New York-based company’s units that sell life insurance and property-casualty coverage to attract private shareholders as the U.S. winds down a rescue that began in 2008 and swelled to $182.3 billion. The Treasury Department sold $20.7 billion of its AIG shares in September, cuttings its stake to 16 percent from a majority.

“The government ownership has been a real overhang for the company,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., said before results were announced. “There weren’t that many investors involved, and now it’s sort of the opposite, so this is going to be the first quarterly call for a lot of people.” The company is scheduled to discuss results at a conference call at 8 a.m. New York time tomorrow.

Mortgage Bonds

The U.S. recouped the cost of rescuing AIG in September’s share sale and recorded a profit for taxpayers. The gain was generated by the Federal Reserve Bank of New York, which wound down its portion of AIG’s bailout in August by selling mortgage bonds it assumed in the rescue. Treasury can again sell shares when a lockup ends Nov. 9.

Chartis, the property-casualty unit led by CEO Peter Hancock, posted a pretax profit of $949 million, compared with $551 million a year earlier, as investment income climbed. The global property-casualty insurer spent $1.05 on claims and expenses for every premium dollar it collected, compared with spending $1.06 a year earlier. Catastrophe losses narrowed from a year earlier when Hurricane Irene lashed the U.S. East Coast.

Premium revenue at Chartis, the insurer of commercial property, corporate boards, and airplanes, fell about 3.2 percent to $8.75 billion, from $9.04 billion a year earlier. Hancock is working to raise prices and shun less attractive business, Stirling said.

Life Insurance

AIG slipped 45 cents to $34.75 at 5:38 p.m. in extended trading. The company, which reported results after the close of regular trading, gained 52 percent this year on the New York Stock Exchange, the best performance among 22 companies in the Standard & Poor’s 500 Insurance Index. (S5INSU) The stock has dropped 96 percent since the end of 2007.

AIG’s U.S. life insurance and retirement division, led by CEO Jay Wintrob, reported pretax profit of $889 million, compared with $346 million a year earlier, as capital gains jumped. Premiums, deposits and other considerations fell about 19 percent to $4.79 billion from $5.88 billion a year earlier as low interest rates pressured sales of fixed-annuity and group- deposit products.

AIG said its core insurance units will resume using the AIG name on Nov. 11, as Benmosche works to revive a brand his predecessor Edward Liddy called “wounded and disgraced,” in 2009. Benmosche also introduced a new logo and agreed to sponsor New Zealand rugby teams including the All Blacks last month.

Book Value

Book value, a measure of assets minus liabilities, increased to $68.87 a share as of Sept. 30 from $60.58 three months earlier. The insurer repurchased $8 billion of its shares from the U.S. in the third quarter.

AIG recorded gains of $330 million related to the value of mortgage bonds that were held by the Fed vehicle created to help rescue the company. The firm’s stake in AIA added $527 million to profit. A year earlier, the insurer recorded a loss of about $2.3 billion tied to AIA’s value and the Fed vehicle lost $931 million.

So-called alternative investments generated gains of $276 million, compared with a $180 million profit a year earlier, AIG said in a supplemental filing. Income from private equity fell by 53 percent to $174 million from $372 million a year earlier. Hedge funds added $102 million, compared with a loss of $192 million a year earlier.

AIG had $19.3 billion of alternative investments as of Sept. 30, little changed from June 30. Returns for hedge fund and private equity investments are reported on a one month and one-quarter lag.

Real Estate

Benmosche said this week that AIG is seeking to invest directly in real estate to boost returns. The insurer’s investment real estate holdings climbed to $3.04 billion as of Sept. 30 from $2.92 billion three months earlier.

Net unrealized gains on bonds available for sale widened to $23.2 billion from $18.2 billion three months earlier, led by corporate debt and residential mortgage-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.

International Lease Finance Corp., AIG’s plane-leasing business, reported pretax profit of $40 million, compared with a loss of $1.33 billion a year earlier when the firm took $1.5 billion of charges related to aircraft impairments. Revenue rose 2.4 percent to $1.15 billion. AIG has said it is seeking to sell part of the unit in an initial public offering.

Mortgage Insurance

AIG’s mortgage insurer, United Guaranty, reported operating profit of $3 million, compared with a loss of $98 million a year earlier. Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs.

AIA, the Hong Kong-based insurer part-owned by AIG, gained 9.1 percent during the quarter. AIG sold most of AIA in a 2010 initial public offering to raise funds to help repay its U.S. rescue. The insurer sold another $2 billion in September, cutting its stake to about 14 percent.

AIG said last month it reached the final stage of review to be designated a systemically important financial institution, which could lead to regulation by the Fed and tighter capital rules. Prudential Financial Inc. (PRU), the second-biggest U.S. life insurer, also is in the final review step.

MetLife Inc. (MET), the largest U.S. life insurer, is regulated by the Fed as a bank-holding company and is seeking to sell deposits to limit the oversight.

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

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

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