AIG's huge 2Q loss shows credit market woes linger

Thursday August 7, 12:52 am ET By Madlen Read, AP Business Writer
AIG loses more than $5B in 2Q, dashing investors' hopes that mortgage market woes behind it
NEW YORK (AP) -- American International Group Inc. posted its third straight quarterly loss, a rude awakening to investors hoping that troubles in the insurer's mortgage market investments were starting to level off.
Shares of AIG fell nearly 8 percent in after-hours trading.
The world's largest insurer suffered a deficit of $5.36 billion in the second quarter after losing $5.56 billion, or $3.62 billion after taxes, in what are called credit default swaps, and writing down $6.08 billion, or $4.02 billion after taxes, in the value of other investments.
Credit default swaps are insurance policies to protect bondholders against defaults. Over the past three quarters, AIG has lost more than $25 billion, pretax, to credit default swaps, and more than $15 billion, pretax, in other investments.
Financial institutions that bet heavily on risky mortgage-backed securities have been pummeled since the start of the credit crisis. When the mortgages underlying these securities began failing, the value of the investments plunged, forcing companies like AIG to heavily mark down the value of their holdings.
Investors' abandonment of the credit markets last year brought the value of debt securities down even further, and the continuing wave of foreclosures this year has extended the losses at financial companies.
Some analysts believe AIG may have more losses ahead of it.
"Management either seems unaware or unwilling to admit the full level of the company's exposure to risky assets," said Byron MacLeod of Gradient Analytics. He noted that the collateral AIG has put up to offset unrealized losses, related primarily to the credit default swaps portfolio, has risen to $16.5 billion in the second quarter from $9.7 billion in the first quarter and from $5.3 billion in the fourth quarter.
"There's no quick fix here for the company," MacLeod said. "Things are still deteriorating for AIG's assets, so it's really hard to call a bottom at this point."
AIG lost $5.36 billion in the April-to-June period, or $2.06 per share. In the same period last year the company earned $4.28 billion, or $1.64 per share.
After excluding one-time items, the loss per share came to 51 cents -- much worse than the 63-cent gain that analysts were anticipating.
AIG's general insurance segment saw a 54.3 percent decline in operating income to $1.39 billion, and its life insurance and retirement services division saw a 10 percent decline in operating income to $2.61 billion. The company's asset management unit also suffered a decline in income.
Back in May, having posted two consecutive quarterly losses, AIG decided to raise capital in an effort to improve its financial standing. AIG said Wednesday that it raised approximately $20 billion in capital through the sale of $7.47 billion of common stock, $5.88 billion in equity units and $6.91 billion in certain fixed-income securities.
Then in June, the insurer replaced its then-Chief Executive Martin Sullivan with Citigroup Inc. veteran Robert Willumstad. Willumstad said at the time that he would review AIG's businesses, and that there were "no sacred cows." The CEO reiterated those thoughts Wednesday, and said the insurer will report on its progress in late September.
"Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," Willumstad said in a statement. "These results do not reflect the earnings power and potential of AIG's businesses and it is clear that we have a lot of work to do to restore AIG's profitability to where it should be."
AIG executives will hold a conference call to discuss the company's results with investors on Thursday at 8:30 a.m. Eastern time.
The insurer's dropped $2.25, or 7.7 percent, to $26.84 in after-hours trading, having fallen 80 cents, or 2.7 percent, to close Wednesday at $29.09.