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AIG Could Seek Another Bailout as it Struggles to Return to Profitability

By , Associate Editor, Money Morning •

American International Group Inc. (NYSE: AIG), the insurance giant that received billions in federal bailout money, on Friday reported an $8.9 billion fourth-quarter loss. AIG dismissed the loss as part of its rebuilding process, but it also acknowledged that it may require even more government financing.

The loss is not nearly as bad as the previous year's $61.7 billion fourth-quarter stumble - the biggest quarterly loss in corporate history - but at $65.51 a share, it's still much higher than analysts predicted.

Amid scrutiny, AIG in September 2008 received a $182.3 billion bailout, which gave the government an 80% stake in its business. Since then, AIG's debt pay-off funds have generally come from the sale of its non-core assets. AIG recognizes these "fire-sales" as the best way to pay back its debts while also streamlining its business.

After two profitable quarters in 2009, AIG reported the following fourth-quarter expenses:

  • $6.2 billion in charges from paying down its U.S. Federal Reserve credit line by $25 billion.
  • $2.8 billion charge on the pending sale of Hong-Kong-based Nan Shan Life Insurance Co. Ltd.
  • $2.3 billion towards strengthening its commercial insurance reserves.

These expenses were piled on top of decreasing sales in the poorly performing insurance industry. AIG reported lower sales in its property/casualty and foreign life insurance divisions. The commercial insurance industry saw rates fall 5.6% in last year's fourth quarter, continuing a price decline that started in 2004. Competitors speculate that AIG's price slashing might be so drastic they can't cover claims, Bloomberg News reported.

Despite the numbers, AIG is taking a confident position that it's doing all it can to dig out of its debt hole.

"I think it's fair to say that we made substantial progress in refocusing our businesses on growth and profitability, and we set in place the framework for repaying the U.S. taxpayers for their support of our company during its darkest days," said AIG Chief Executive Officer Robert Benmosche in a message on AIG's website.

However, AIG still owes $23.4 billion to the Federal Reserve Bank of New York, and $46.9 billion to the Treasury Department.

The financial products division also took a hit at the start of February when AIG reduced employees' bonuses by at least 10%, allowing $100 million for 200 people. The move will save around $20 million, but is still a hefty sum for employees whose actions attributed to the biggest company losses in history.

AIG sold off 41% of the portfolio in 2009, but announced last week it would halt selling and keep $500 billion of assets to take advantage of a credit market upswing and increase its investment returns.

AIG also recently dropped a plan to use cash flow from life insurance policies to pay off $8.5 billion, believing that improving markets will generate enough cash.

"While a tremendous amount of work remains to be done, and there are no guarantees in life, we believe we are on our way to regaining our stature as one of the world's largest and most successful property/casualty insurance operations," said Benmosche.

Investors did not share AIG's confidence, and shares were down 9% mid-afternoon Friday.

"While there are a few shafts of encouraging light, results overall were murkier and messier than the market overall expected," Nomura Securities analyst David Havens told The Wall Street Journal.

Worse, the insurer has indicated that it may need even more federal assistance.

"Should certain of these risks emerge, AIG may need additional support from the U.S. government," the company said in its annual 10-K filing, referring to risks associated with poor market performance.

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