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Chartis CR disappoints as AIG books profit on realised gains

American International Group (AIG) reported a moderate $455mn third quarter net profit - compared to the giant $24.5bn net loss of the same period last year - as net realised capital losses stabilised.

But the company is likely to look unrecognisable this time next year as it gears up for the IPO of some of its largest core units and the sale of further non-core assets. As such, potential buyers will be closely monitoring the underlying performance of the businesses as they strive to maintain stability in challenging conditions.

AIG's General Insurance division - rebranded Chartis in July 2009, in a process still being rolled out across the group - reported operating income before net realised capital gains or losses of $722mn, compared to $105mn in the third quarter of 2008.

The improvement was largely driven by a $612mn increase in net investment income. However, the underlying profitability of underwriting in the business disappointed; the combined ratio of 105.2 percent was higher than 104.5 percent in Q3 2008 - a period that included heavy hurricane losses.

The insurer said the deterioration reflected adverse loss development from prior accident years, while the current accident year loss ratio had been hit by credit crisis related claims.

The ratio decreased by 2.6 points in its commercial insurance division to 106.4 percent, as a result of lower cat losses in the quarter. However, it increased in its foreign general insurance operations by 6.2 points to 103.4 percent.

That increase came as a result of a rise in "charge offs" and transition costs, as well as losses related to the worldwide financial crisis, said AIG.

In line with previous quarters this year, the top line was also down on 2008 in General Insurance, with net written premiums written of $8.1bn down some 13 percent on the prior-year period.

AIG attributed this to the impact of foreign exchange movements combined with the sale of its Brazilian operations "and the strategic decision to remain price disciplined, particularly in workers' compensation", together with the general impact of the weakened economy.

But it said that business retention was at its highest level since September 2008, while new business written exceeded $1.1bn for the quarter, with pricing remaining stable.

Chartis could see an IPO as early as the second quarter of 2010, according to sources, after being effectively ring-fenced in its own special purpose vehicle (SPV), in a move announced by its parent earlier this year.

Life insurance and retirement services - whose core businesses AIA and ALICO are also being placed into an SPV ahead of a planned IPO - saw Q3 operating income more than double before net realised capital gains or losses from $1.0bn to $2.2bn.

Significant improvements in investment income were again behind the result,, primarily from higher partnership and mutual fund returns, according to the insurer.

The top line was relatively stable. Despite a 16.1 percent fall in premiums and other considerations to $7.9bn compared to Q3 2008, the figure was relatively flat with the first two quarters of 2009.

AIG Financial Products - the division at the core of the insurer's troubles and which contributed the lion's share of its losses over the last year - reported a third quarter operating profit of $1.4bn, compared to an operating loss of $8.3bn in the prior-year period.

Unrealised market valuation gains on its notorious super senior credit default swap portfolio of $959mn made a major contribution, as did a favourable credit valuation adjustment of $730mn. However, the latter was partially offset by $569mn of interest charges on inter-company borrowings with AIG.

AIG's Asset Management arm suffered a $1.1bn operating loss, however, compared to an operating loss of $28mn in Q3 2008, reflecting a $697mn goodwill impairment.

Group wide, the ownership structure of AIG following its effective nationalisation last year means that only $92mn of the $455mn net profit is attributable to its common shareholders.

Net realised capital losses of $1.8bn were slashed from the massive $15.1bn writedowns taken in the third quarter of 2008.

AIG highlighted that through the first nine months of 2009 it has entered into agreements to sell or completed the sale of operations and assets that are expected to generate $5.6bn in after-tax proceeds to repay its government loans - including the $41bn outstanding on its Federal Reserve Bank of New York facility.

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