AIG's Earnings: Trouble Ahead and Trouble Behind

The bubble of optimism that surrounded American International Group's fourth quarter results - spurred on by media like Bloomberg News - has apparently burst, with its shares trading where they were in January at $25.

To be fair, the insurer's results were better than last year. But operating units, such as property and casualty insurer Chartis, did not perform well, and there's no indication these units will fare any better in 2010. Chartis is one of the insurer's core holdings, and AIG doesn't plan to sell it.

AIG had to strengthen Chartis's loss reserves by $2.3 billion based on its year-end analysis of the reserves' adequacy, particularly relating to workers comp claims dating back as far as 2002. And those all-important premiums dropped by more than 2 percent because of "challenging economic conditions" and the fact that AIG held the line on pricing.

Other insurers would argue that AIG isn't holding the line. In fact, the company, which was bailed out by the federal government in 2008, is undercutting competitors when it comes to making deals. And some of these may be bad deals, since AIG's combined ratio, which essentially measures premiums against costs and losses, was 132.5. Simply put: AIG is spending $1.32 to earn $1. Although AIG is quick to point out that much of these additional costs came from that reserve strengthening, it doesn't bode well if AIG is pricing its insurance too low, particularly in hurricane-prone areas.

A $9 billion loss does look better than the $62 billion loss a year ago. Even so, investors and the few analysts who still cover the company were expecting more. According to the Associated Press, the $65.51 per share loss was well below the expectation of $3.94.

More troubling than the $9 billion loss is AIG's recent warning that there could be worse news to come. In its Securities and Exchange Commission filing the insurer said it "may need additional government support to meet its obligations as they come due" and without that support, AIG may not be continue as a "going concern" in the future. Among its concerns are the failure of its restructuring plan because of the decline in asset values or the inability of purchasers of its assets to come up with financing.

Would Treasury Secretary Tim Geithner, battered by Congress for his role in the $182 billion bailout in 2008, cooperate? In 2008, the firm was too big to fail. At some point AIG may become too controversial to save.