Chartis bitten by 2002 and prior reserve addition as AIG posts year-end loss

This compared to a $1.7bn operating loss in the fourth quarter of 2008 that included a $1.2bn goodwill impairment charge. The Chartis numbers were published as AIG reported a net loss of $8.9bn for the fourth quarter of last year compared to a net loss of $61.7bn in the final quarter of 2008. AIG said that the net loss was mainly attributed to a previously disclosed $6.2bn of interest and amortisation expense on the prepaid commitment asset that resulted from the $25bn reduction in the balance outstanding and the maximum credit available under the Federal Reserve Bank of New York (FRBNY) Credit Facility.hideIt was also driven by a previously disclosed $2.8bn loss, recognised on the pending sale of Nan Shan Life Insurance Company, a valuation allowance charge of $2.7bn for tax benefits that cannot be currently recognised and the $2.3bn loss reserve strengthening at Chartis. The Chartis reserve increase followed the completion of AIG’s annual year-end loss reserve study. The company said that the number represents some 3.6% of Chartis’ total carried loss reserves of $63.2bn at December 31, 2009. The reserve additions are mainly caused by excess casualty and excess workers compensation lines. The additions were made largely for the accident years 2002 and prior that made such a mess of so many insurance and reinsurance company accounts in the earlier part of this decade and was largely responsible for the collapse and sale to SCOR of Swiss reinsurance group Converium. AIG was keen to point out, however, that at December 31, 2009, Chartis U.S.’s statutory policyholder surplus was approximately $27bn, an increase of about 4% from year-end 2008. It also reported that Chartis recorded net premiums written of $6.9bn in the fourth quarter 2009, a 2.2% decrease from the fourth quarter of 2008. “The modest decline is a significant improvement over prior quarters in 2009 and reflects increased business retention, new business submissions, and a more stable rate environment,” stated the company. “However, net premium writings continue to be affected by challenging economic conditions, the effect of foreign exchange, and Chartis’ strategic decision to maintain price discipline in lines of business where market rates are unsatisfactory, particularly in certain classes of workers’ compensation,” added AIG.The fourth quarter 2009 combined ratio at Chartis was 132.5%, including 28.2% from reserve strengthening. This compared with 120.8% at the end of 2008 that included 13.8% related to the goodwill impairment. For the full year 2009, the current accident year combined ratio was 99.2%, a 2.6% improvement over the 2008 accident year combined ratio. Commenting on the fourth quarter and full year 2009 results, AIG President and Chief Executive Officer Robert H. Benmosche said: “Our team made great progress during the year in executing our strategic restructuring plan, by stabilizing and strengthening AIG’s insurance businesses, reducing AIG Financial Products Corp. exposures, and positioning certain businesses for sale.” One of those businesses positioned for sale was AIA Group, one of the world's largest pan-Asian life insurance companies. It was announced yesterday that it will be sold to U.K. insurance group Prudential for about $35.5bn. The sale price includes about $25bn in cash, $8.5bn in face value of equity and equity-linked securities and $2bn in face value of preferred stock of Prudential. AIG said that the cash portion of the proceeds from the sale, the largest to date in AIG's ongoing restructuring efforts. It will be used to redeem preferred interests with a liquidation preference of about $16bn held by the FRBNY in the special purpose vehicle, formed to hold the interests in AIA and to repay about $9bn under the FRBNY Credit Facility. AIG said that it plans to monetise the $10.5bn in face value of Prudential securities over time, following the lapse of minimum holding periods. “All net cash proceeds from the monetisation of these securities will be used to repay any outstanding debt under the FRBNY Credit Facility,” stated the New York-based group. Prudential will pay for the acquisition through a $20bn rights issue, $5bn of new debt and the $10.5bn of stock handed over to AIG. Tidjane Thiam, the company's Chief Executive, said the acquisition would give Prudential a "unique position in the fastest growing market in the world". He added that some large investors in the company had already given their backing to the deal. The company revealed that full-year operating profits on an embedded value beat analyst expectations by jumping 8% to £3.1bn. The figures enabled the company to raise its dividend 5% to 19.85p. Prudential will continue to be headquartered in London but will also list in Hong Kong. The company said that it will not sell its UK business, that was rumoured to be up for sale, to fund the transaction.

Chartis bitten by 2002 and prior reserve addition as AIG posts year-end loss

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