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By CYRIL TUOHY, managing editor

The financial health of AIG's commercial insurance subsidiaries, long considered the crown jewel of AIG Inc.'s sprawling financial services empire, has not been in doubt as the commercial insurers are governed by state regulations, and operate with no debt.

Still, the news was welcomed by brokers and policyholders who were reeling from the news posted only hours before, that AIG Inc., the commercial insurance group's parent company, suffered a loss of $24.5 billion in the third quarter.

On Monday, AIG reported third-quarter net income dropped $27.55 billion, going from a net profit of $3.09 billion, in the third-quarter of 2007, to a net loss of $24.47 billion. The challenges facing AIG Inc., said Doyle, were "unrelated to the commercial insurance operations."

Looking to shine the spotlight on an otherwise dismal earnings picture at the holding company level, Doyle noted the commercial insurance group's strong rates of client retention. Premium retention, he also noted, was "within a couple of points of the norm."

Employee turnover rates, he said, are "about the same as last year," though he admitted that new business for the property casualty unit was "down about 20 percent" from the previous year. AIG Commercial Insurance, Doyle also noted, finished the third quarter with $5.6 billion in net written premium.

While Doyle and Schimek were looking to reassure clients with their latest announcements, a number of risk managers still appeared as if they needed some convincing.

In separate interviews with risk managers attending a conference in Florida, buyers recalled how late last year and earlier this year, when the insurance sector's earnings reports began to deteriorate, AIG's former CEO Martin Sullivan kept saying the worst was over. AIG reported a net loss of $7.8 billion in the first quarter of this year.

But by the end of the second quarter, when AIG posted more shocking losses, it was clear that AIG's top executives had a credibility problem and Sullivan was replaced, first by former Citigroup president and COO Robert Willumstad and then by Edward M. Liddy, the former CEO of Allstate.

In a conference call with reporters on Monday, Liddy said that AIG's insurance units were making an effort to reach out once more to clients. "All of our insurance businesses are making a concerted effort to get in front of customers and brokers to address their concerns," he said.

Hence the visit Tuesday by Doyle and Schimek to Philadelphia, where big commercial insurance brokers, property and casualty, and health insurers all have offices.

Schimek said the renegotiation of AIG's government bailout will leave AIG Inc. with $21 billion in debt against a new five-year $60 billion credit facility with a lower interest rate. That is down from the two-year $85 billion loan originally agreed to with the government. AIG will repay the debt through the sale of some of AIG's companies, he also said.

Former CEO Maurice "Hank" Greenberg said Monday that the prices of the assets held by AIG would rise in the next three years, making it easier for AIG to repay its debt to the government. Greenberg is a major shareholder in AIG.

AIG found itself short of cash in September, when insurance guarantees sold by its London-based financial products unit required AIG to cover trading partners who held mortgage-backed securities which went into default following the collapse of the housing market.

The cash shortage forced AIG to ask the U.S. Treasury for help.

November 12, 2008

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