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AIG Heads Down Wrong Road to Redemption

NEW YORK ( TheStreet) -- American International Group (AIG - Get Report) is counting on insurance income to pay off about $26.5 billion of its tab to the government.

The problem? AIG's property and casualty, and life and annuity subsidiaries Chartis and SunAmerica, the future of its business, reported $1 billion in operating losses last year. What's worse is that AIG is selling most of its foreign insurance units -- AIA to Prudential in the U.K. and ALICO to MetLife (MET - Get Report). Those businesses raked in operating income of $3.2 billion in 2009 and produced 39% of AIG's insurance premiums.

According to AIG's Web site, goal No. 1 is the "creation of strong, more independent insurance businesses worthy of investor confidence to stabilize and protect the value of AIG's important franchise businesses." It doesn't appear that AIG reads its own marketing.

AIG is selling the crown jewels and keeping the paste. Even after factoring in the $2.3 billion increase in reserves in the fourth quarter, Chartis had an underwriting loss of $300 million.

Liberty Mutual Chief Executive Officer Edmund Kelly last year complained several times about what he said were AIG's "extremely aggressive" business practices, such as multi-year policies and "ridiculously low pricing." Other insurers complained but didn't name AIG.

AIG's fourth-quarter earnings release, published a week ago, contradicts the pricing allegations. It says Chartis has made a decision to maintain price discipline in businesses where market rates are unsatisfactory. There is little evidence of this.

Sun America, the rebranded life and annuity group, is banking on increased fixed-annuity sales and investment gains. There's still pressure on premium income, down 30% in 2009.

Investors can expect property and casualty insurance profit margins to be soft during the year. Net premiums fell between 3% to 5% in 2009, the third consecutive year, SNL Financial says. In addition, SNL Financial questions the sustainability of relatively light catastrophe losses and reserve increases.

SNL Financial speculates that the insurance market will change, perhaps including a more aggressive approach to underwriting by growth-starved carriers. Alternatively, it suggests there may be additional industry consolidation. Neither of those approaches will be good for AIG, which is unable to expand or compete in a price war.

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