AIG could pay back US government - Moody's

AIG could pay much or all of the money of the preffered equity stake the US government took out in it in 2008 following the insurer's collapse, Moody's has said.

The US ratings agency said: "Assuming further stabilization in AIG's operations and in the global financial markets, we believe that the firm can generate sufficient value to fully repay the government's senior secured loan and to repay much or all of its preferred equity stake, giving the government incentive to continue supporting AIG and its various creditors.

But it noted: "However, a material decline in the realizable values of AIG's assets could reduce the government's incentive to support other creditors. Accordingly, AIG's ratings could be lowered if we perceive a decline in realizable values".

In the third quarter of 2009, AIG reported net income of $455m, down from $1.8bn in the second quarter of 2009, mainly because of higher realized capital losses.

Adjusted net income, which excludes realized capital gains (losses) and hedging activities that do not qualify for hedge accounting, amounted to $1.9bn in the third quarter of 2009, down slightly from $2bn in the quarter before. AIG's equity account grew by $14.4bn during the third quarter to $76.5bn at quarter-end, driven by unrealized appreciation of AIG's investment portfolio which was buoyed by broad improvement in securities markets.

At its Chartis business, pretax operating income before realized capital gains declined to $722m in the third quarter from $1bn in the previous one, as steady new business volume and higher investment income were offset by adverse loss development and higher catastrophe losses.

In Life Insurance & Retirement Services, pretax operating income before realized capital gains (losses) increased to $2.2bn in the third quarter from $1.5bn in 2Q09, reflecting a moderate decline in premiums and other considerations offset by higher investment income

"The third quarter results of American International Group, Inc. show continued stabilization of the core insurance operations despite challenging market conditions. The firm has made tangible progress on its restructuring plan, albeit with a slowdown or hold on certain asset dispositions. The US government continues to provide extensive capital and liquidity support to the company. In light of these factors, we are maintaining the current ratings and outlook on AIG," Moody's said.

It added: "Since the appointment of Robert Benmosche as CEO in August 2009, AIG has slowed the pace of certain restructuring activities to focus on rebuilding the values of some businesses that had previously been slated for sale. In August 2009, the company named a management team for the combined Domestic Life and Retirement Services group, effectively ending the effort to sell this business. In October 2009, AIG stopped trying to sell AIG Star Life and AIG Edison Life, its two Japanese life insurance companies, and announced plans to hold them for the foreseeable future. We believe that the slower approach to restructuring could help AIG to generate more favorable values from its business portfolio than would be the case under rushed asset sales. The restructuring plan still relies heavily on government support. Our current ratings on AIG reflect our understanding that the government is committed to working with the firm to maintain its ability to meet obligations as they come due throughout the restructuring process."

AIG's troubled financial services group, AIG Financial Products (AIGFP) materially reduced the size and risk of its business on favorable terms over the past few quarters, Moody's noted. "We expect further steady progress in this regard, assuming that capital markets remain reasonably liquid, although some of AIGFP's exposures may still take considerable time to unwind. Other non-core operations, such as International Lease Finance Corporation, American General Finance and United Guaranty, may also rely on AIG's capital and liquidity support for a prolonged period," it added.