AIG's Earnings: The 'Benmosche Bloom' Is Off the Rose

A quick look at American International Group's third quarter earnings this morning would seem to give recent investors in the troubled insurer the feeling that their money had been well spent. The headlines all blared that AIG reported $455 million of net income compared to an abysmal loss of $24.5 billion in the dark third quarter of last year. AIG's per share results also outpaced analysts' estimates of $1.98; it earned $2.85 a share, excluding investments and the government's stake.

So why is the stock getting hammered? At last report, it was down nearly 10 percent at about $35.50.

There are many good reasons, and you can take your pick. First, the estimates include only four analysts, and they weren't sure of themselves because of special items and charges the giant insurer took. One reason incoming CEO Robert Benmosche may have forgone a conference call today was because it would have been an embarrassment, like giving a party where no one comes.

Second, AIG's shares have already had a more than satisfactory run up, shooting from $6.60 to $56.80, with virtually all of it coming after Benmosche took charge in August. Even sarcastic former AIG CEO Hank Greenberg is complimentary of Benmosche, and certainly he is an improvement on Ed Liddy, his predecessor, who had more of the virtues of an undertaker than a CEO.

But Benmosche is the first to admit he's no miracle worker. "Expect continued volatility ... in the coming quarters," he said in the earnings statement.

"Continued volatility" may be a mild term for what's coming down the pike. Like most other insurers, AIG is taking hits in its two key businesses: property casualty insurance and life insurance. Net premiums in its newly-labeled "Chartis" property insurance were down 13 percent.

Of course there are a variety of reasons, such as the recession and foreign exchange. But its ratio of earnings to payouts looks very bad. AIG essentially paid out $1.05 for every dollar it took in. Other insurers have been saying their premiums are falling because of irrational competition from AIG, which is backed by the government. And, let's remember, this was a good third quarter, with no hurricanes.

Life insurance premiums in the third quarter were also down more than 16 percent.

One bright spot: AIG Financial Products, which caused all the problems last year with its huge holdings of mortgage-backed securities, saw an operating profit of $1.4 billion as many of the securities in its portfolio rebounded. The downside is that nearly a billion of this is unrealized gains because these securities are still in its portfolio. Also AIGFP is going out of business as quickly as possible, and many of its people are likely to leave shortly for greener pastures because of government-imposed limits on their salaries.

All told, it was a confusing quarter, and Benmosche didn't try to deny it. He did say that the third quarter showed "signs of stabilization." But, like everyone else, his future - and AIG's - depends a lot on continued improvement in the economy, along with the fervent hope that the government doesn't pull the plug.