AIG Heads Down Wrong Road to Redemption

AIG is selling off its crown jewels, leaving its weak businesses to shoulder billions in bailout debt.
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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


in the U.K. and ALICO to


(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.

And, although fixed-income annuity policies are expected to grow, AIG will most likely fall further behind with other annuity products that are proving to be a hard to sell for rivals.

Looking at the losses, it's hard to see how fourth-quarter results fulfilled CEO Robert Benmosche's statement that AIG "made great progress during the year in executing our strategic restructuring plan, by stabilizing and strengthening AIG's insurance businesses."

Sucking out over $25 billion in future income will hardly strengthen Chartis or SunAmerica. It appears that the insurers will remain relatively weak for the foreseeable future.

This will mean taxpayers shouldn't expect bailout money to be repaid anytime soon. AIG's remaining insurance units will bear the brunt of the repayments, holding back development of the business.

-- Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.