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AIG continues payback despite loss

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AIG continues payback despite loss

NEW YORK—Despite a series of developments at American International Group Inc. last week that included a $4.11 billion third-quarter loss, analysts remain cautiously optimistic about the future of the company and expect it to continue on its path away from government ownership.

While the government still holds a major stake in the New York-based company, AIG paid back close to $1 billion in government loans last week.

Analysts expect the government to continue with its planned exit from AIG, but any sale will likely be delayed until stock market conditions improve, according to reports.

Meanwhile, a report critical of the 2008 bailout was released.

AIG reported significant losses for the third quarter and first nine months of 2011.

AIG's third-quarter loss of $4.11 billion compares with a $2.52 billion loss in the year-earlier period. For the first nine months of the year, it reported a net loss attributable to AIG of $2 billion vs. a $3.39 billion loss in the same period of 2010.

Pretax income for AIG's Chartis Inc. property/casualty unit plunged 71.8% year-over-year, falling to $910 million during the first nine months of 2011. The unit reported net premiums written of $26.99 billion, a 12.3% increase.

Some $2 billion in catastrophe losses, a $2.3 billion decline in the value of its stake in the Hong Kong insurer AIA Group Ltd. and a one-time $1.5 billion charge on aircraft in its International Lease Finance Corp. unit hurt AIG's bottom line for the first nine months.

On a separate front last week, AIG repaid another $972 million to the Treasury using money from last year's sale of American Life Insurance Co. That brought the government's remaining investment to $50 billion, the insurer and the federal agency said in a joint announcement. AIG owes the Federal Reserve Bank of New York $17.5 billion in loans that are guaranteed by assets with a market value of about $30.7 billion.

The U.S. Treasury Department still holds a 77% stake in AIG following the government's $182 billion bailout. While the stated intention is for the government to eventually sell its stake in AIG, any share sale likely will be delayed until market conditions improve, according to a report in The Wall Street Journal.

AIG, meanwhile, also has authorized the buyback of up to $1 billion in shares depending on market conditions.

AIG President and CEO Robert H. Benmosche was optimistic about the company's prospects.

“Despite the difficult external environment, we are encouraged by the progress we've made and the underlying strength of our core insurance businesses,” Mr. Benmosche said in a statement.

Analysts found pluses and minuses in the developments.

“They've reduced risk on their balance sheet,” said Jimmy Bhullar, an analyst at JPMorgan Chase & Co. in New York. “Their challenge now is improving (profit) margins.”

While the entire property/casualty industry has faced challenges this year, most insurers have bolstered their earnings with favorable reserve development, whereas AIG in February had to strengthen its reserves for the 2010 fourth quarter, analysts said.

“The skeptics continue to say (AIG) is under-reserved. We tend to think that it's not possible to know,” said Joshua Shanker, an analyst in New York at Deutsche Bank Securities Inc. “But AIG wanted to put as much distance as possible between them and future reserve charges, so we're not worried.”

Rating agency analysts say the company appears more stable.

“From a ratings perspective, things have been stable,” said Mark Rouck, an analyst in Chicago at Fitch Ratings Inc. “They've made progress on the restructuring and shoring up liquidity.”

John Iten, director at the New York ratings agency Standard & Poor's Corp., said: “We feel the operation has stabilized.” AIG just has to continue with its recovery plan and is “well down that path” already.

Treasury's possible delay in selling its AIG shares continues to pressure AIG's stock price, but analysts see this as temporary.

“The overhang on the stock shouldn't affect AIG's ability to run its business, unless they need to raise equity capital. But AIG doesn't need to do that,” said David Merkel, a principal at Baltimore-based investment advisory firm Aleph Investments L.L.C.

John L. Ward, CEO of the private equity firm Cincinnatus Partners L.L.C. in Cincinnati, said nobody knows how long AIG needs to recover or how many detours it might hit on the way. But he noted that the insurer has already weathered many storms.

“They've still got a ways to go, but I expect they'll get through,” Mr. Ward said.

Meanwhile, the Government Accountability Office released a report last week saying the Federal Reserve System may have overstepped its authority in handling the 2008 bailout of AIG. The report said the government could have begun the process of seeking private financing earlier and recommended that regulators use more sophisticated monitoring of financial companies.