AIG Expected to Finish Year in the Red

With all the focus on scandals involving American International Group, there hasn't been much discussion of how the company's actual businesses are doing, but Wall Street is expecting a loss in the fourth quarter.
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NEW YORK (

TheStreet

) -- With all the focus on the scandals involving

American International Group

(AIG) - Get Report

, there hasn't been much discussion of how the company's actual businesses are performing.

Only a couple of analysts cover the firm any longer, and they expect AIG to report a fourth-quarter loss of $4.79 per share, according to

Thomson-Reuters

. While that may be factoring in restructuring and bailout charges as well, from the looks of it, AIG's business lines didn't have stellar performance either.

When all the restructuring is done, AIG plans to retain its core property-casualty insurance business, and maintain some life-insurance exposure as well. On the plus side for those businesses, there were probably few claims from natural disasters last quarter, since the hurricane season was largely uneventful, and tornado and storm activity experienced a lull. The impact of the earthquake in Haiti -- if AIG even has any exposure there -- wouldn't be felt until the company's first-quarter report.

AIG has also had more success in retaining customers than some had assumed during its darkest days. In fact, its drive to win new business has given competitors a run for their money, according to anecdotal evidence from industry executives and analyst notes.

But given the moderation in fixed-income trading last quarter, as credit markets continued to ease and spreads continued to rationalize, P&C profits may not have been anything to marvel at.

In a recent report on the P&C sector, Sandler O'Neill analyst Paul Newsome noted that the industry's book values appeared "mostly flat" last quarter. That's because, unless an insurer's investment portfolios were weighted in equities and municipal bonds, its book-value growth was likely subpar at best. Most insurers are fixed-income-centric, apart from

The Progressive Corp.

(PGR) - Get Report

, which has greater exposure to equities.

Looking down the line at future results, the expected rise in interest rates stands to hurt both the life and P&C businesses as well. The Federal Reserve is expected to begin raising its rate target from a historically low level of 0% to 0.25% within the next couple of quarters.

"Rising interest rates raise reported book values in the short-term, but, in the long-term, net investment incomes, and therefore earnings, fall," Newsome notes.

Credit Suisse's Moshe Orenbuch put it simply in a recent report on financials, characterizing fundamentals for the life insurance business as "uninspiring" and for the P&C business as "weak, with no price hardening." Additionally, the industry has been drawing down capital from reserves, making them vulnerable to claims down the line.

"EPS will be under pressure for the next few years," Orenbuch predicts.

AIG hasn't yet said when it will report year-end results, and of course capital adequacy isn't its main concern anymore; repaying government capital is. The insurer still owes roughly $70 billion, plus interest and dividends, to the government. It's also in the process of unwinding $1 trillion worth of complex assets that remain in its financial products unit, while divesting an array of non-core businesses.

The AIG bailout is one that the government expects to lose money. The Obama administration is preparing to announce plans to recoup losses by collecting roughly $90 billion in

fees

from financial firms that have at least $50 billion in assets. AIG is among those that will be taxed, along with companies like

Bank of America

(BAC) - Get Report

,

Citigroup

(C) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Goldman Sachs

(GS) - Get Report

, and

Morgan Stanley

(MS) - Get Report

.

Public attention has also been cast onto AIG's counterparty payouts last year. The issue has turned into something of a regulatory secrecy scandal, with disclosures that the

Securities and Exchange Commission

granted AIG permission to hide information until 2018, and that the Fed advised the insurer not to disclose counterparties. Congress has subpoenaed records for a hearing next week, and demanded that Treasury Secretary Timothy Geithner testify about the decision-making process. Geithner was at that time in charge of the New York Fed, which was overseeing AIG's bailout.

Meanwhile, AIG's top lawyer resigned in protest over what she considered a paltry pay package, and may reportedly be replaced by a top gun at Lehman Brothers. Ironically, Lehman's failure caused a meltdown in the financial markets which exacerbated AIG's plight.

Amid all the headlines, AIG shares have fallen about 3% since the start of the year, to close at $29.06 on relatively light volume Wednesday. The firm is among one of the most heavily bet-against names on the New York Stock Exchange, with over 20% of its float sold short. By comparison, Bank of America has under 4% sold short, and insurance competitor

Allstate

(ALL) - Get Report

has 1.2%.

--

Written by Lauren Tara LaCapra in New York