AIG and Losses Go Hand in Hand
Things just seem to be getting worse for American International Group (NYS: AIG) , which posted a loss of $4.1 billion in the third quarter, up from $2.5 billion a year ago to its biggest loss since 2009. Low interest rates, widening credit spreads, and a write-off in the aircraft leasing unit dealt a severe blow to the bottom line, sending shares downward.
Losses, losses, losses...
Since the financial crisis, AIG has struggled to report profits. This quarter was no different. As Reuters points out, it was the 10th out of the last 15 quarters where AIG lost at least a $1 billion.
A $2.3 billion decline in the value of AIG's stake in Asian insurer AIA Group along with a $931 million fall in the fair value of its holding in Maiden Lane III also hurt the bottom line. Worse, while AIG buckled under losses, its peers enjoyed reasonably successful quarters, with both MetLife (NYS: MET) and Prudential (NYS: PRU) trotting their bottom lines up.
Interestingly, Prudential tried to buy AIA from AIG a year ago for around $35.5 billion. Prudential shareholders forced the company to bargain on the price, which did not go well with AIG. Things may have been different had AIG negotiated a bit.
A low interest rate regime and wider credit spreads in housing assets led to losses in Maiden Lane III, a holding company created in 2008 when the government acquired AIG. Maiden Lane III was created by the government to buy collateralized debt obligations on which AIG had written those credit default swap agreements that would have otherwise brought down the whole company.
AIG's aircraft leasing business was hit because of the growing popularity of newer and more fuel efficient planes. The hit translated into an impairment of $1.5 billion as the management decided to write down almost 100 planes.
Since its bailout, AIG has been busy looking for ways to repay its debt to the government. Last week, it was able to return $972 million to Uncle Sam by selling off its American Life Insurance Co., otherwise known as Alico, to insurer MetLife. AIG still owes the government around $68 billion. Maybe AIG will look to sell off some more units in an attempt to raise more cash to pay off its debt.
MetLife's third-quarter net income shot up 10 times helped by the Alico buy, which doubled its international sales and boosted its bottom line.
In an effort to somewhat reverse the trend, AIG is planning to go back into the business of securities lending. We all remember what happened three years ago and how miserably the insurer failed. Will the company play its cards right this time round? We'll see.
In a move that surprised many, AIG revealed plans to buy back $1 billion of its common stock in a bid to push up the stock price somewhat.
AIG's investors have had a tough time -- the stock has languished near the bottom for way too long. This year alone, the stock has lost nearly 60% of its value. Market conditions aren't really helping AIG either. It will be interesting to see how AIG fights the market and repays the government. To do so, click here and keep a close eye on AIG by adding it to your personalized stock watchlist.
At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies listed above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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