AIG: Doctor, There's a Pulse

American International Group (AIG) will long be remembered as the towering insurance and financial services company that almost deep-sixed the U.S. economy. Following a near-death experience in 2008, the insurer has required a series of government bailouts totaling $182.3 billion. So here, for a change, is some news about AIG that won't make you cringe: The company is showing signs of a turnaround.

New York-based AIG was scheduled to report results on Feb. 26, a couple of days after Bloomberg BusinessWeek went to press. An expected fourth-quarter loss, stemming from more than $5 billion in charges tied to paying down debt, won't tell the whole story. Buried under the ugly numbers is evidence that AIG's primary insurance businesses are picking up. Consider that revenue at AIG's property-casualty businesses rose for three straight quarters last year after plunging 23% in the final three months of 2008. The unit, which has been rebranded Chartis, accounts for more than a third of the company's total revenue. Meanwhile, sales of life insurance and retirement products rose for the three months ended in September 2009, the first increase since the crisis.

Despite the dire predictions of many in the industry, it is even beginning to look like the 91-year-old company may manage to hang on to its position as the largest U.S. commercial insurer. "They've actually done a very good job of keeping the ship afloat," says James S. Tisch, CEO of Loews (L), which owns about 90% of rival insurer CNA Financial.

Asset Sales

Robert H. Benmosche, the brash executive brought in last August to run AIG, needs to boost insurance profits to repay government loans. The 65-year-old former MetLife (MET) CEO, who declined to be interviewed, has said he will rebuild businesses damaged after losses at AIG's derivatives unit—called an unregulated hedge fund by Federal Reserve Chairman Ben S. Bernanke—sapped the parent of cash.

Once the world's largest insurer by assets, AIG has shrunk by about a fifth since the government rescue. The company has retreated from asset management for institutional clients and the U.S. auto insurance industry, striking deals to sell businesses for a total of more than $12 billion. It has scaled back operations at its plane-leasing unit and plans to wind down its derivatives division by yearend. AIG also transferred stakes in its two biggest overseas life insurance businesses to the Fed to pay down its credit line by $25 billion.

Diminished is better than dead, though. Recall that AIG's stock plunged 97% in 2008. Lawmakers railed over retention bonuses paid to employees of the derivatives unit. There was "concern that most of AIG's largest customers would flee entirely," says Robert P. Hartwig, president of the Insurance Information Institute, a trade organization in New York. "That didn't happen." In a research note published on Dec. 14, Barclays Capital (BCS) analyst Jay Gelb reported that about 75% of insurance buyers using AIG said they plan to stay with the company.

Insurance buyers may be sticking with AIG partly because of the government's 80% stake in the company and its Fed credit line, says Shivan Subramaniam, CEO of FM Global, a commercial-property insurer in Johnston, R.I. "People view the federal government as being a backstop," he says.

Some competitors have a different view of AIG's renewed vigor. Chubb (CB) and Liberty Mutual Group say AIG is holding on to customers by slashing prices. These claims are being investigated by Joel Ario, the insurance commissioner for Pennsylvania, the state where the bulk of AIG's commercial insurance business is based. "We're very concerned about underpricing, because it can become a solvency risk," Ario says. "It's also true that companies are constantly complaining about their competitors pricing too low in a soft market." He declined to comment further on the probe.

Says Mark Herr, an AIG spokesman: "We have not changed how we underwrite or price our business."

Shrinking Market

AIG is competing for a bigger share of a shrinking pie. U.S. property and casualty sales slipped 5% industrywide in the third quarter, the biggest drop since at least 1986, because of lower insurance rates and reduced demand. Annualized premiums for U.S. life insurers dropped 19% in the first nine months of 2009 from the same period the year before, according to trade group Limra International.

Surviving as a smaller company focused on insurance doesn't mean that AIG will be able to repay all its debt to taxpayers. The Government Accountability Office said in December that the U.S. will probably lose $30.4 billion on the bailout. The rescue included a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Dept., and up to $52.5 billion in funds to pay Goldman Sachs (GS) and other counterparties to settle derivatives contracts and securities-lending obligations.

Hank Greenberg, 84, who ran AIG for almost four decades until 2005 and controls the largest stake after Washington through a closely held investment vehicle, argues that the government might have a better shot at recouping its money if it dialed back its holding to 20%. His contention: A company that is majority-owned by Uncle Sam cannot attract private investment. "Look, I hope they are stabilizing," Greenberg says. "We should renegotiate the terms of the bailout to make it more likely to repay taxpayers."

A sweeter deal for AIG is unlikely, given public outrage over executive pay and the cost of the rescue. Benmosche has said he will strengthen units before selling them to repay debts and limit federal involvement. Doing that will be a tough challenge—though not a bad state of affairs for a company that came close to corporate extinction 18 months ago.

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Goldman and AIG: The Plot Thickens

A five-page document that the New York Fed fought making public for more than a year shows that the banks that turned to AIG to insure against losses on collateralized debt obligations were in most cases the same institutions that underwrote the securities, according to a Feb. 23 Bloomberg story. The CDOs minted by Goldman Sachs (GS) were especially toxic, with losses in some cases exceeding 75% of their notional value.

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