AIG Investors Fear This Looming Shadow

American International Group Inc. (NYSE:AIG) this afternoon reported first-quarter profit more than doubled in the last quarter on investment gains and fewer claims costs from natural disasters. Net income rose to $3.21 billion, or $1.71 a share, from $1.3 billion, or 31 cents a share, in the year-ago period, when the insurer booked charges related to paying back a Federal Reserve credit line that helped it through the financial crisis.

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Now majority owned by the U.S. Department of Treasury, the New York-based company has turned things around under CEO Robert Benmosche, who has presided over a 47 percent surge in AIG’s share price this year as the insurer retired obligations to the Treasury and bought back shares, cutting the department’s stake to 70 percent. Chairman Steve Miller now predicts AIG could be paid off within as little as a year.

Operating income for the January through March quarter, excluding some investment results, was $1.65 a share, beating the average Bloomberg estimate of $1.13 a share. AIG’s Chartis unit reported operating income of $1 billion in the first quarter, compared to a $424 million loss a year earlier.

AIG was helped by relatively fewer catastrophes in the first quarter than in the year-ago period, when the March 2011 earthquake and tsunami in Japan was the most costly disaster for many insurers in the entire year. Resurgent demand for mortgage-related assets also boosted earnings.

AIG sold Hong Kong-based insurer AIA Group Ltd during the quarter, raising $6 billion that it in turn gave to the Treasury to buy back shares. It also struck a deal to retire $8.5 billion of the Treasury’s interests in entities tied to the bailout. Part of the proceeds for that repayment came from its wind-down of Maiden Lane II, a New York Fed-controlled fund that held mortgage-backed securities taken over in the rescue.

Maiden Lane III, another bailout fund, holds mortgage investments AIG insured against losses. The New York Fed began divesting those assets in an auction last month. Selling the rest of Maiden Lane II and its remaining stake in AIA could generate funds for AIG to buy back even more shares, which could make for a sooner government exit.

The insurer was rescued in 2008 with a bailout that was revised at least four times, swelling to as much as $182.3 billion at one point. As of March 20, outstanding government funds totaled about $45 billion.

AIG shares closed regular trading today down 1.78 percent in anticipation of earnings, and have fallen another 1.29 percent since the company’s after-hours report. As of 4:34 p.m. EDT, AIG shares were trading at $34.14. The Treasury needs to sell shares at an average of $28.72 to break even on the government’s investment.

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