American International Group reported a fourth-quarter loss of $8.9 billion, a large improvement over the $61.7 billion in loss it reported for the same period in 2008 when its implosion led to a federal bailout.

Meanwhile, AIG officials appear to be reconsidering the use of cash flows from life insurance policies to reimburse the Federal Reserve Bank of New York (FRBNY) for an $8.5 billion loan, the Wall Street Journal reports, citing people familiar with the matter. AIG had created that amount in securities backed by cash flows from policies underwritten by its life insurance units, according to the report.

AIG, according to the newspaper, is considering using other means to pay back the loan, in part because the stock market has improved, giving it more value in its assets. From September 2007 to last year, AIG obtained nearly $180 million in federal aid, much of which it has already paid back through the sale of some of its units.

In its latest financial report, AIG attributed $6.2 billion of the losses to interest and amortization expense, including $5.2 billion of accelerated amortization expense on the prepaid commitment asset resulting from the $25 billion reduction in the balance outstanding and the maximum credit available under the FRBNY Credit Facility.

AIG’s general insurance unit, Chartis, reported a fourth quarter operating losses of $1.8 billion, slightly worse than the prior year’s fourth quarter, when it reported $1.7 billion operating loss in the fourth quarter of 2008. Those results included a $1.2 billion goodwill impairment charge, company officials said.

At Dec. 31, 2009, Chartis U.S.’s statutory policyholder surplus was up 4%, to $27 billion, compared to year-end 2008.

Challenges remain

Robert H. Benmosche

Chartis recorded net premiums written of $6.9 billion in the fourth quarter, down 2.2% from the fourth quarter of 2008. The company described the number as a “modest decline” and a “significant improvement over prior quarters in 2009 and reflects increased business retention, new business submissions, and a more stable rate environment,” according to a statement.

But the insurer cautions that “net premium writings continue to be affected by challenging economic conditions, the effect of foreign exchange, and Chartis’ strategic decision to maintain price discipline in lines of business where market rates are unsatisfactory, particularly in certain classes of workers’ compensation.”

“Our team made great progress during the year in executing our strategic restructuring plan, by stabilizing and strengthening AIG’s insurance businesses, reducing AIG Financial Products Corp. (AIGFP) exposures, and positioning certain businesses for sale,” AIG President and Chief Executive Officer Robert H. Benmosche said in a statement

He pointed out that in the fourth quarter the company took “significant strides” toward the dispositions of American International Assurance Co. and American Life Insurance Co. and through its creation of two special purpose vehicles (SPVs) that now own those companies. The insurer was able to reduce its debt to the FRBNY Credit Facility by $25 billion in exchange for FRBNY ownership of preferred interests in the SPVs, he added.

He said its domestic life insurance and retirement services companies, recently rebranded as the SunAmerica Financial Group, have “made notable progress in re-establishing relationships and reinvigorating sales distributions.”

Benmosche said he is “increasingly confident in how we see the mix of AIG’s businesses over the long term.

“We are taking the right steps to regain our stature as one of the most respected and diverse property-casualty operations in the world, with a strong U.S. life and annuity operation and several other businesses that will enhance our nucleus, help us to meet our goal of repaying taxpayers and provide value to the communities where we operate,” Mr. Benmosche said.