AIG slides to huge loss in Q3; receives expanded bailout package - Update2

(RTTNews) - Troubled insurer American International Group Inc. (AIG | Quote | Chart | News | PowerRating) on Monday reported a hefty net loss for the third quarter compared to a profit in the same period last year, hurt by writedowns on the value of credit-default swaps as well as losses tied to the declining value of its investment portfolio. Separately, AIG announced a restructuring of the original bailout package provided to it by the federal government in September that was intended to prevent the company from collapse. The new package includes lower interest rates and provides more time to the company to repay the debt. The company's stock is currently up 21% in the regular trading session.

Under the revised $152 billion bailout package, the federal government will reduce the original bridge loan provided to the company to $60 billion from $85 billion and will buy $40 billion of AIG's preferred shares in return for partial ownership. The government will also purchase $52.2 billion of mortgage securities owned or backed by the company and will establish two facilities for the purpose.

The revised package is expected to give AIG's chief executive officer Edward Liddy additional time to salvage the company, which was rescued by the U.S. government in September from bankruptcy threat after three quarterly losses that exceeded $18 billion, primarily due to credit default swap agreements. Efforts by AIG to repay the original $85 billion loan stalled as plunging financial markets forced potential buyers to shore up their own balance sheets.

Third Quarter Results

The company's net loss for the third quarter was $24.47 billion, or $9.05 per share, compared to net income of $3.09 billion, or $1.19 per share, in the same period last year. The loss was the company's fourth straight quarterly loss.

The results for the latest quarter include pre-tax net realized capital losses of $18.31 billion arising primarily from impairment charges on AIG's investment portfolio. The company noted that the securities lending program accounted for $11.7 billion of these losses, of which $6.9 billion resulted from AIG's change in intent to hold these securities to recovery as the program winds down.

The impairment charges also included $3.9 billion resulting from the severe, rapid decline in fair value of securities outside of the securities lending program, for which AIG concluded it could not reasonably assert that the impairment period would be temporary.

Additionally, the net loss for the quarter includes $7.05 billion in writedowns on the value of credit-default swaps, or guarantees the company sold to protect fixed-income investors. Also contributing to the net loss were losses on partnership and mutual fund investments of $1.7 billion before tax, compared to $454 million of income in the previous-year quarter.

AIG's adjusted net loss for the quarter was $9.24 billion, or $3.42 per share, compared to adjusted net income of $3.49 billion, or $1.35 per share, in the year-ago quarter. On average, fourteen analysts polled by First Call/Thomson Financial estimated the company to report a loss of $0.90 per share for the quarter. Analysts' estimates typically exclude special items.

Operating loss for the latest quarter was $2.56 billion compared to operating income of $2.44 billion in the same period last year.

At September 30, 2008, shareholders' equity was $71.18 billion, including the addition of $23 billion of consideration received for preferred stock not yet issued. The company's consolidated assets at September 30, 2008 were $1.02 trillion.

Segmental Results

General Insurance

Operating loss before net realized capital gains or losses for the segment was $899 million compared to operating profit of $2.51 billion in the year-ago period.

Results for the quarter include catastrophe losses of $1.39 billion, primarily related to hurricanes Gustav and Ike, compared to losses of $24 million in the year-ago period. In addition, the results reflected an increase in losses at United Guaranty Corp. of $901 million, which included a premium deficiency reserve established on the second-lien business and a decline in net investment income of $659 million, primarily due to losses from partnership and mutual fund investments.

General Insurance net premiums written were $11.73 billion, down 0.8% from $11.82 billion in the same period last year. However, net premiums earned increased 2.6% to $11.73 billion. Analysts had a consensus revenue estimate for the quarter of $18.00 billion.

At September 30, 2008, General Insurance net loss and loss adjustment reserves totaled $73.75 billion, an increase of $1.42 billion in the third quarter 2008.

Life Insurance & Retirement Services

The segment's operating income before net realized capital gains or losses dropped 51.4% to $1.01 billion from $2.49 billion in the prior-year period.

The results for the quarter were adversely impacted by losses from partnership and mutual fund investments due to the poor performance of equity markets and trading account losses related to certain investment-linked products in the U.K. Results were also impacted by increases in deferred acquisition cost expense primarily in the Domestic Retirement Services business.

Premiums, deposits and other considerations declined 5.2% to $22.92 billion, primarily related to lower variable annuity sales both in the U.S. and internationally.

Financial Services

The segment reported an operating loss of $8.35 billion before net realized capital gains and the effect of FAS 133 in the quarter, compared to operating profit of $307 million a year ago. The company noted that AIG Financial Products Corp., currently in run-off, continued to be pressured by the deteriorating U.S. housing and credit market conditions, as well as ratings downgrades.

Consumer Finance reported a loss for the quarter of $434 million, which included a goodwill impairment charge and an increase in the allowance for finance receivable losses due to higher delinquencies and charge offs.

Asset Management The segment reported an operating loss before net realized capital gains and losses of $28 million, compared to operating profit of $353 million in the same period last year. The results for the latest quarter reflect lower partnership income and valuation adjustments on certain real estate investments.

Year-To-Date Results

For the nine months, AIG reported a net loss of $37.63 billion, or $14.40 per share, compared to net income of $11.49 billion, or $4.40 per share, in the same period last year.

Adjusted net loss for the period was $14.12 billion, or $5.40 per share, compared to adjusted net income of $12.51 billion, or $4.79 per share, in the year-ago period.

Revised Bailout Package

In mid-September, the Federal Reserve attempted to bail out AIG by providing the company with a two-year, $85 billion bridge loan. The government reluctantly provided AIG with the line of credit after an unsuccessful attempt to get Wall Street firms to prop up the company. The Fed then said it would loan the company an additional $37.8 billion at much lower rates. Last week, AIG gained access to an additional $20.9 billion through an additional Fed credit line that allowed the company to sell short-term debt known as commercial paper, to the government at a rate of less than 4%. However, AIG continued to face a liquidity crunch that is greater than anticipated.

Under the revised bailout package that includes lower interest rates and more time to repay the debt, the federal government will replace the original two-year $85 billion loan provided to AIG to $60 billion with a five-year duration, and will buy $40 billion of newly issued AIG's preferred shares under the $700 billion bailout package for the U.S. financial sector, known as the Troubled Asset Relief Program, announced by the Treasury last month. The bailout package has been meant primarily for banks, but is open to other financial institutions. The preferred shares will carry a dividend of about 10%.

Part of the restructured loan is a freeze on bonuses for the top 70 company executives, as well as limiting the "golden parachutes," or executive compensation packages.

The changes in the bailout package follow widespread criticism from some large shareholders of the original package, which would have required AIG to quickly sell assets in a declining market while also paying steep interest rates on its loans from the government.

The revised bailout plan from the government is designed to enhance the company's ability to sell assets for a decent price and the taxpayer's ability to recover the money that has been pumped into the beleaguered insurer. The new package aims to shift to the government many of the risks once absorbed by AIG.

The Federal Reserve said that certain others terms of the existing New York Fed credit facility established on September 16 will be modified. The Federal Reserve said it will reduce the interest by 5.5 percentage points. Accordingly, the interest rate will now be reduced to three-month Libor plus 3.0% per annum from current rate of three-month Libor plus 8.5% per annum.

The government will also buy $52.5 billion of mortgage securities owned or backed by the company and will establish two facilities for the purpose. These facilities are designed to alleviate capital and liquidity pressures on AIG associated with two distinct portfolios of mortgage-related securities that continued to drain cash amid the collapse of the subprime mortgage market.

Under the Residential Mortgage-Backed Securities Facility, the New York Fed will lend up to $22.5 billion of a newly formed limited liability company, or LLC, to fund the LLC's purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio.

AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

The Fed noted that the proceeds from the facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, which had $19.9 billion outstanding as of November 5, will be repaid and terminated.

AIG said that as a result of this transaction, its remaining exposure to losses from its U.S. securities lending program will be limited to declines in market value prior to closing and its $1 billion of funding.

In the Collateralized Debt Obligations Facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of up to $70 billion of multi-sector collateralized debt obligations, or CDOs, on which AIG Financial Products has written credit default swap contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio.

According to the Fed, the loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

The Fed added that the U.S. government intends to exit its support of AIG over time in a disciplined manner consistent with maximizing the value of its investments and promoting financial stability.

As a result of this transaction, AIG said its remaining exposure to losses on the Multi-Sector CDOs underlying the terminated CDS will be limited to declines in market value prior to closing and it's up to $5 billion funding to the financing entity.

Edward Liddy, Chairman and CEO of AIG said, "Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies."

AIG said it will continue to participate in the recent government program being utilized by many companies for the sale of commercial paper. The company noted that the Commercial Paper Funding Facility, or CPFF, has allowed it to reenter the commercial paper market. AIG said it is authorized to issue up to $20.9 billion to the CPFF and has currently issued approximately $15.3 billion as of November 5, 2008.

Stock Quotes

In Monday's regular trading session, AIG is trading at $2.56, up $0.45 or 21.33% on a volume of 82.85 million shares. The stock has been trading in a range of $1.25-$62.30 in the past 52 weeks.

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