Insurer AIG posts large loss on bad mortgage bets

Original Link: http://www.reuters.com/article/marketsNews/idINN06230920080807

By Lilla Zuill

NEW YORK, Aug 6 (Reuters) - American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) posted its third consecutive quarterly net loss of more than $5 billion on Wednesday as it wrote down bad mortgage-related investments, sending its shares down almost 8 percent.

The world's largest insurer and one of the hardest hit in the credit crisis also reported a general deterioration in its mainstream insurance businesses, which were hurt in particular by a decline in investment income and losses from its mortgage insurer, United Guaranty Corp.

"Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," AIG's chairman and chief executive Robert Willumstad said in a statement. Willumstad took the CEO job in June after Martin Sullivan resigned.

"We have a lot of work to do to restore AIG's profitability to where it should be," Willumstad warned, adding that AIG was considering all options as it looked to improve results and its risk profile and protect its capital base.

"We are examining every business, as well as the assumptions underlying how we do business in the markets where we have a presence," Willumstad said. He said a progress report would be issued in late September.

BATHED IN RED

AIG said its second-quarter net loss was $5.36 billion, or a loss of $2.06 a share, compared with net income of $4.28 billion, or $1.64 a share, a year ago. It had an adjusted net loss of 51 cents a share. Analysts, on average, had forecast a profit of 46 cents a share, according to Reuters Estimates.

It was the second-largest loss in AIG's 89-year history, surpassed only by the $7.7 billion net loss it recorded in the first quarter of 2008. AIG has posted net losses exceeding $18 billion over the past three quarters.

Long known for profitability, AIG said some of its workers had received Wells notices, indicating the U.S. Securities and Exchange Commission was considering civil action. The Justice Department and SEC are investigating investments that led to AIG's quarterly losses.

AIG said it recorded $5.56 billion in second quarter unrealized market valuation losses on credit default swaps, the same area that led to losses in the prior two quarters.

The company's financial ratings have been lowered, and it has been forced to raise $20 billion in recent months to strengthen its balance sheet.

Portfolio manager Thomas Russo at Gardner, Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion in assets and owns AIG shares, said he was concerned that AIG's credit losses would undermine its insurance business. AIG is best known for its insurance business.

Russo said he owns AIG shares because of strong growth forecasts for its foreign life insurance and retirement services. "What would be important is to know ... is this an up-to-date and full reflection of what they know to be their exposures," he said.

Much of the second-quarter 2008 loss was due to what AIG described as "severe, rapid declines in fair values of certain residential mortgage-backed securities and other structured securities in the second quarter." AIG said it had concluded that it could not "reasonably assert that the recovery period would be temporary."

AIG said second-quarter results included pre-tax net realized capital losses of $6.08 billion ($4.02 billion after tax) arising primarily from other-than-temporary impairment charges in its investment portfolio. The company said this compared to pre-tax net realized capital losses of $28 million ($17 million after tax) in the year-ago quarter.

General insurance operating income fell 54 percent to $1.39 billion, reflecting a 28.3 percent decline in investment income primarily due to lower partnership and mutual fund income, and an increase of $440 million in operating losses at United Guaranty Corp.

The general insurance division wrote $12.22 billion in net premiums in the quarter, slightly more than last year's $12.14 billion.

"They may have taken a write down in the same vein as Merrill Lynch did," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion. "It looks like the new CEO took what I call a kitchen sink quarter," meaning all the bad news was out of the way.

AIG shares fell 7.7 percent in after-market trading to $26.84. The shares closed down 2.68 percent at $29.09 in the regular session on the New York Stock Exchange.

LIFE AND OTHER BUSINESS

Income from life insurance and retirement services fell 10 percent to $2.6 billion.

Premiums, deposits and other revenue were $25.55 billion, up 16.4 percent compared to a year ago. The company said they were favorably affected by foreign exchange.

AIG also has lending units, an asset management division and aircraft leasing.

Its financial services business reported a $5.88 billion loss for the quarter. But operating income for aircraft leasing, long one of AIG's most profitable units, rose 85.3 percent to $352 million compared to a year ago. The company said that was due to a larger fleet, higher lease rates, lower interest rates and more aircraft sales.

Consumer finance, a division that offered home mortgages, posted a $22 million operating loss compared to $58 million in operating income last year.

Equity research analyst Bill Fitzpatrick at Optique Capital in Milwaukee, Wisconsin, said the credit swap losses were "a little higher than we would have hoped for," but he said he expected AIG to benefit as market conditions improve.

"The thesis remains the same that these portfolios will ultimately be marked up," Fitzpatrick said. (Additional reporting by Paritosh Bansal and Dan Wilchins; Editing by Andre Grenon)